KOLKATA/MUMBAI: India’s benchmark bond yields surged to their highest in about four years and the rupee breached the 71 mark to hit a new low, pointing to likely challenges for the country in repaying overseas loans and building further dollar stockpiles.The rupee on Monday fell to 71.21 to a dollar amid overseas fund outflows, losing 0.31 per cent from Friday. The benchmark bond yield rose five basis points to close at 8 per cent, the highest closing level since December 1, 2014, underscoring the impact of a widening current account deficit (CAD) on Asia’s thirdbiggest economy.“RBI should pay attention to external sector balances, as the central bank has limited stock of foreign exchange reserves and limited capacity to handle the rupee depreciation,” former Reserve Bank of India Governor YV Reddy said last week.India’s foreign exchange reserves have fallen $26 billion since April and are now on the brink of going below the $400-billion mark.Market participants said the central bank’s approach toward the latest decline in the local unit has been nuanced. Unlike in 2013, when Mint Street had stepped in aggressively to stem the decline of the currency, the Reserve Bank of India (RBI) has rather stayed away unless the rupee alone has fallen against the dollar. When the unit has fallen in line with other EM currencies, the bank has not intervened.“RBI was communicating over the phone but did not aggressively intervene through market operations. This was perhaps because the fall in the rupee was due to trade related transactions,” a bank treasury head told ET.An email sent to RBI remained unanswered until the publication of this report.RBI’s intervention bears fruit only when there are no large outflows from India. “It would have created arbitrage opportunities if RBI forcefully resists rupee’s rout when there are overseas investment outflows,” a currency dealer said, requesting anonymity.Foreign portfolio investors have net sold ?43,703 crore worth of domestic bonds and equities this year, show data from National Securities Depository.“A material shortfall in capital inflows would have negative implications for both the balance of payments position and reserve accumulation,” Moody’s Investors Service said in a report.The widening current account deficit has contributed to 10 per cent currency depreciation since the beginning of the year (as of August 24), it said. “While the weaker currency will support price competitiveness, it is unlikely to reverse the widening trade deficit, which hit a five-year high of 6.7 per cent of GDP in July 2018.”Moody’s expected the current account deficit to widen, but expressed confidence that it would remain significantly narrower than five years ago.“We expect India’s current account deficit to widen to 2.5 per cent of GDP in the fiscal year ending March 2019, from 1.5 per cent in fiscal 2018, driven by higher oil prices and robust non-oil import demand,” the multi-national rating company said.The central bank in its annual report cautioned that India’s external sector will have to confront global headwinds, but expressed confidence that the current account deficit would largely be financed by foreign direct investment The combined effect of a widening current account deficit and subsequent rupee depreciation is likely to increase the borrowing costs of Indian corporates, said India Ratings and Research.“A weakening rupee, coupled with rising interest rates, and forward premium could impinge on the ability of Indian corporates to tap foreign markets to raise debt capital,” it said.The widening CAD amid capital outflows is exerting upward pressure on bond yields as well.