Prime Minister Manmohan Singh has approved a two-year extension for the Reserve Bank of India chief Duvvuri Subbarao, a move seen by analysts as favouring continuity at a time of global economic uncertainty.
The Reserve Bank of India (RBI) governor was appointed for a three-year term in September 2008 and was immediately tasked with the mandate of protecting Asia's third-largest economy from the aftermath of the global financial crisis.
For much of his term, the soft-spoken Subbarao has struggled to contain high inflation in India, triggered by factors which were not always under his control, and has often been criticised for being 'behind the curve'.
But analysts said Subbarao's record in handling the global financial crisis that erupted in the latter half of 2008 may have gone in favour of his reappointment.
"Perhaps he is best placed to deal with the current situation where there are lots of disturbances in the global economy", said N.Bhanumurthy, senior economist at National Institute of Public Finance and Policy, a Delhi-based policy think tank.
Prior to taking over the reins of the RBI, Subbarao was India's finance secretary, the senior-most bureaucrat in the finance ministry.
"There have been some criticism for his handling of inflation but to be fair to him, there were factors beyond his control and most major economies have been experiencing a high trend rate of inflation", said Bhanumurthy.
The RBI has raised rates 11 times since March 2010 to battle high inflation, which quickened to 9.44 percent in June.
"The Prime Minister has approved the extension of the term of Dr. D. Subbarao as Governor of Reserve Bank of India for a further period of two years with effect from Sept. 5, 2011 i.e. up to Sept. 4, 2013", a statement issued by the Prime Minister's Office said.
The race for the top job at the Indian central bank had hotted up in recent months with some bureaucrats and economists throwing their hat into the ring.
The chief economic adviser to the finance ministry, Kaushik Basu, a former chief economist of the International Monetary Fund, Raghuram Rajan, and a former adviser to the finance ministry, Ashok Lahiri, were believed to be in the fray, according to media reports.
Subbarao had spoken out recently on the need for fiscal policy measures to complement monetary action to help fight inflation. Many market watchers saw the comments as a sign of a growing divergence between the finance ministry and the Indian central bank on key policy issues.
However, sources say the prime minister wanted continuity in top regulatory positions, especially after Standard & Poor's ratings downgrade of the United States on Friday and a worsening of the euro zone's debt crisis sparked global market turmoil. That could have swung the balance in Subbarao's favour.
"Currently in a possibility of another significant meltdown, this continuity (at RBI) will give some comfort to the general public and in particular in the financial sector," said Sujan Hajra, chief economist at Anand Rathi Securities.