The total ``incentive'' is even higher if the hidden cost of tax exemption is added. Dwelling on the extent of incentive/subsidy provided by the government to make the rupee cost affordable, the report said assuming the State Bank of India creates rupee assets out of dollar liabilities to the tune of 50 per cent and annualised depreciation of 6 per cent, the cost of the exchange risk works out to $9.48 million on every $100 million raised.

However, faced with sanctions, declining investor sentiment and Moody's downgrade incentives for such an issue could be many, it said. The float helps in shoring up the forex resources, easing thepressure on the country and aiding domestic liquidity. It might actually result in reverse capital flight (in the form of gifts from NRIs), it said.

Further, SBI can raise five-year dollar funds at 7.75 per cent probably the cheapest alternative available even when compared to a sovereign issue, which would anyway be difficult to place in the wake of sanctions. Besides, a sovereign issue would require a huge spread (around 300 basis points over Libor), thereby setting a bad benchmark, making the interest rate of 7.5 per cent appear low.

However, while such a comparison might appear favourable, a more meaningful indicator would be marginal cost of raising ``additional'' resources, the report added.

Additional resources implies net of FCNR funds which are re-deployed in RIBs. The government ends up paying more (150-200 bps) for essentially the same funds, increasing the implied cost of additional funds. A reallocation ratio of 50 per cent raises the effective cost of net inflows to more than 9.75 percent, making the cost argument critically dependent on percentage of fresh funds mobilised.

Another concern is the extent of ``incentive/subsidy'' provided by the government to make the rupee cost "affordable". While the currency risk is to be shared by the SBI and the government, majority of the risk would probably be borne by the government, the study said.

SBI is offering rupee funds to collecting banks at 9.5 per cent when the cost of dollar funds is 7.75 per cent (commission and other expenses to be borne by SBI) leaving little room for currency risk.

Even though the government would need to provide ``subsidy'' only to the extent SBI creates rupee assets out of the dollar liabilities (rupee loans) it will by no means be small, it said. The issue, however, provides an excellent opportunity for investors, especially for rupee returns. The residents can get tax-free rupee returns of up to 19 per cent, it said.