Duvvuri Subbarao will now hold the post at the nation's central bank - which was established in 1935 in accordance with the provisions of the Reserve Bank of India Act 1934 - until September 2013, despite being initially appointed in 2008 for a period of three years, Bloomberg reports.
In an effort to keep price gains under control, Mr Subbarao has elevated interest rates 11 times since the middle of March 2010.
Shubhada Rao, chief economist at Yes Bank - based in Mumbai - described the climate in India as "difficult" and suggested it is beneficial to maintain the status quo with regard to important policy-making decisions.
"The RBI has a tough task ahead, balancing inflation and the threat of another global downturn," the industry figure noted.
By Claire Archer