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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.
Challenges for Municipal Bond Market in India are:
i Issues with municipal bond
ii Credit worthiness
iii Lack of transparency
Select the correct answer using the code given below
i and ii only
i and iii only
ii and iii only
all of the above
none of these
Challenges for Municipal Bond Market in India
•Issues with municipal bond: They are relatively less liquid instruments due to absence of secondary market for them, which results in investors having to hold municipal bonds until maturity.
•Credit worthiness: Earlier 94 cities which are part of Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), were rated by agencies such as CRISIL. Out of 94, 55 cities got investment grade rating (BBB- and above), while other 39 were rated below BBB-.
•Except in a few big ULBs the budgeting and accounting systems of ULBs still lack transparency which leaves scope for misappropriation of assets and misleading picture of income and expenditure of ULBs.
By: Himani Bihagra ProfileResourcesReport error
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