The Reserve Bank of India (RBI) has allowed foreign portfolio investors (FPIs) to invest in municipal bonds.A municipal bond, commonly known as a muni bond, is a bond issued by a local government or territory, or one of their agencies. It is generally used to finance public projects such as roads, schools, airports and seaports, and infrastructure-related repairs.The circular comes almost two weeks after the Reserve Bank of India (RBI) permitted FPIs to invest in municipal bonds as a measure to broaden access of non–resident investors to debt instruments in the country. As per the RBI, foreign investment in municipal bonds should be within the limits set for FPI investment in State Development Loans (SDLs).Like any bond, municipal bond rates depend on three factors. Most bond rates follow the equivalent Treasury bond yield. These are risk-free bonds issued by the federal government. Since munis have a bit more risk, they will pay slightly higher rates than the federal bond.It also depends on the municipality's credit rating. The highest is AAA. Since they are also the safest, they pay the lowest rates. Lower-rated bonds pay a higher rate to compensate investors for the greater risk of default.There are two types of municipal bonds, General obligation bonds are issued for enhancing civic amenities such as water, sanitation, garbage disposal, etc. They generally are not backed by revenue from a specific project. Revenue bonds are issued for a specific purpose such as construction of a toll road or a toll bridge.