Mumbai: The rupee beefed up past 40 per dollar today for the first time in over 9-years, after lower U.S. rates lightened up the prospect for high-yielding assets like the Indian rupee.

Heavy dollar buyouts by state-owned banking institutions brought down the rupee’s gains, but the market was supported by anticipations for higher capital flows into record-marking securities.

In early trading, the partially convertible rupee stood at 39.99/40.00 a dollar after getting strengthened to as much as 39.88 a level it last dealt in May 1998 before ceasing some of its profits.

At the peak, the rupee was up nearly one per cent from Wednesday's close of 40.20/21 and extended gains to 11 per cent this year, making it Asia's best performing currency.

A local trader said, “The rupee's gains have been powered by the interest-rate differential and the capital inflows story and that may push the rupee to 39 by the end of the year.”

The U.S. Federal Reserve lowered its federal funds target rate by 50 basis points on Tuesday, to 4.75% bringing up interest rate premium over the US to 300 basis points that market dealers said would draw more capital inflows and add up to the rupee’s upward thrust

The cut in rate also boosted Indian shares by 4.2%, which is its largest gain in last 15 months, on Wednesday. The stock index rose to an all-time high for the second day early today.

Foreign funds have been a key driver for the Indian currency. They have purchased around $1 billion thus far this month taking their net purchases so far in 2007 to about $9.4 billion.