* Mandates BofA, Barclays, DB, JPM, Citigroup, UBS * Bond sale likely to be launched this month By Archana Narayanan MUMBAI, July 2 (Reuters) - State Bank of India aims to raise at least $500 million through a five-year overseas bond sale as soon as this month, two sources with direct knowledge said, potentially reopening the dollar bond market for Indian issuers after a four-month lull. However, bankers involved in the process said it may be aiming much higher. "Going by how the bank is posturing, they may print a deal as big as $1 billion to $2 billion, depending on the pricing," said a banker involved in the deal. Two other participating bankers agreed. Expectations an Indian firm would soon tap the offshore bond market gained momentum after the country moved to support its embattled currency, which hit a record low in late June. Issuers who believe the rupee has bottomed might find it an attractive time to borrow in dollars. In the past few months, Indian companies have refrained from issuing dollar bonds as a surge in risk aversion has made it more expensive for them to come to market. SBI, the country's biggest lender has hired Citigroup, Bank of America Merrill Lynch, Barclays Capital , Deutsche Bank, JP Morgan and UBS for the issue, said the two sources, declining to be named as the process is not public yet. SBI, which last sold overseas bonds in early 2011, will launch the issue depending on market conditions, and is working out a schedule for investor meetings, the sources said. It is eyeing a 5-year bond with a spread equivalent to a swapped level of 350 bps over Libor, two bankers said. Currently, such a deal would price at about 365 bps over Libor, one of the bankers said. NEGATIVE OUTLOOK State-controlled SBI's task is not made easier by rating agency Fitch's recent cut in the credit outlook for India's BBB- rating to negative from stable, after Standard & Poor's made a similar move in April. A downgrade would take the country into junk territory which could make it more expensive for its banks to borrow. In March, ICICI Bank, the country's biggest private-sector lender, hired four banks for a dollar bond issue but has not launched a deal because volatility in the euro zone has put the brakes on deal flows. The last two dollar bond sales from India were in February, when energy conglomerate Reliance Industries raised $1 billion and Axis Bank $500 million. Axis, a private sector lender, priced its deal at 440 bps over U.S. Treasuries, and its paper now trades a 415-435 bps. SBI raised its deposit rates at the weekend, suggesting costs of funds will remain elevated for banks, helping to make overseas borrowing attractive as cash in the domestic banking system cash is expected to remain tight. SBI was downgraded in October by Moody's Investor Service, which cited a thin capital base and worsening asset quality. The Indian government pumped 79 billion rupees ($1.41 billion) into the bank in March, and increased profit helped it boost its capital adequacy ratio. In June, SBI Chairman Pratip Chaudhuri told reporters the lender planned to raise $1-$2 billion from overseas markets in the next three months. SBI officials were not immediately reachable for comment. This year, state-run Indian Overseas Bank picked seven banks to raise $500 million through bonds overseas markets but did not go forward with a deal. Indian companies including Union Bank of India, UCO Bank, Jindal Steel and Power and Power Finance Corp are also looking to issue dollar bonds, sources have said.