Mumbai: The rupee rose to its highest against the US dollar in 9-½ years as dealers bought the domestic currency aggressively in anticipation of increased overseas fund flows into the Indian stock market.

The partially convertible rupee was up 0.4 per cent at 39.42 per dollar in early afternoon trade, its strongest level since March 1998 and above the previous day''s close of 39.575/585.

At the interbank foreign exchange market, the rupee resumed slightly lower at 39.58/60 per dollar from the previous day`s close of 39.5750/5850 a dollar and firmed up to 39.57/58 in late morning deals.

Activity in the forex market was largely influenced by sustained and unprecedented portfolio investments in equity markets, dealers said.

Foreign institutional investors (FIIs) have poured in about $4 billion since September 19 after the US Federal Reserve cut the key interest rates.

The rupee has appreciated against the US dollar by over 11 per cent since January this year.

This has also prompted the World Bank to advise the Indian authorities to look for options beyond tax sops to raise productivity and make the industry globally competitive.

"Appreciation of currency is a challenge for firms... Government should support firms in the early stage of technology development. Tax concessions can be one of the options, but government should look at a range of options to raise productivity levels of the industry," reports quoting World Bank senior economist Mark Dutz said.

Dutz, who is in India for the launch of a report ''Unleashing India''s Innovation'' said: "A fund of funds should be created to spur public-private venture capital funds targeted at early-stage investing."

"I am not sure about the effectiveness of tax concession. The international studies also favour caution on tax concessions," he added.

In July, the finance ministry had announced a relief package of Rs1,400 crore for the exporters hit by currency appreciation. Finance minister P Chidambaram also said instead of intervening in currency market, the government would consider further concessions for exporters.