The former Bolton, Everton and Manchester City star has previously managed the England U21 side and clubs including City, Leeds United and Sunderland.
He has been out of management since leaving Plymouth Argyle in 2011, but he is relishing the chance to be involved in the ISL.
“It's a great opportunity to coach in the Indian Super League. I enjoyed working overseas with Thailand and am very much looking forward to this new challenge," the 58-year-old former Thai boss said in a statement.
British agent Baljit Rihal, who was instrumental in Michael Chopra’s move to the inaugural league which kicks off in October, believes Reid’s appointment adds even more excitement to the ISL.
“There is a solid leadership team at FC Mumbai City and they have obviously made this decision based on Peter's credentials,” Rihal told Sky Sports.
“His wealth of experience is fantastic having managed top-flight clubs Man City and Sunderland, internationally for England U21, and of course more recently in Thailand.
“It seems as though the English have arrived to the party in a big way and I think it will stoke up even more interest in what promises to be an exciting time for Indian football.
“I am currently working with a few other English players and managers who have also shown interest in being a part of this ground breaking event.”
Former England goalkeeper David James is player-manager of ISL side Kerala Blasters and earlier this week ex-Brazil international midfielder Zico was confirmed as head coach of the league’s Goa franchise.
Rihal is backing the former Flamengo star, who has managed clubs including Fenerbahce, Olympiakos and CSKA Moscow, to make a significant impact on football in the sub-continent.
“Zico's appointment has by far been the most high profile to date,” he said. “Can this be eclipsed? You never know with the way things are going in the ISL.
“Zico will have a huge impact in terms of awareness of the ISL, management of the players and just because he is a genuine all round nice guy.
“A true ambassador for the sport, his playing career with Brazil has certainly helped his cause with the Indian public.”
Former Juventus strike partners Alessandro Del Piero and David Trezeguet, ex-Liverpool forward Luis Garcia and Arsenal ‘Invincibles’ Robert Pires and Freddie Ljungberg are among the names that will play in the league.