Rajan, 50, will succeed D Subbarao, who by his hawkish policy stood his ground on continuing with a tight monetary policy despite repeated entreaties from the government to ease interest rates to boost growth. Subbarao will demit office on September 4.
"Prime Minister Manmohan Singh has approved the appointment of Dr Raghuram Rajan as the Governor of Reserve Bank of India (RBI) for a term of three years, vice Dr D Subbarao upon completion of his (Dr Subbarao's) tenure," an official release said.
Rajan, a former IMF chief economist, was appointed as the Chief Economic Advisor in the Finance Ministry in August last year. His appointment as the 23rd central bank chief comes at a challenging time, when the economy is battling industrial slowdown, declining rupee, rising prices and all-time high current account deficit (CAD).
"These are challenging times for the Indian economy and the RBI and government will work together," Rajan said in a statement shortly after the announcement.
"We don't have a magic wand to make the problems disappear. But absolutely we will deal with them." Rajan noted that the RBI has a tradition of integrity, independence and professionalism.