"It (extension) will be good because at this point of time, extension of the RBI Governor is needed. Though there was time till September, we decided (that) we should do it quickly to ensure that there is no uncertainty," Finance Minister Pranab Mukherjee told reporters after announcement of Subbarao's extension as head of the country's monetary authority.
Subbarao, who has played a key role in steering the country out of the global financial meltdown following the fall of America's iconic investment banker Lehman Brothers in September, 2008, will continue as RBI chief till September 5, 2013.
"He (Subbarao) is doing good job and he has already earned his reputation as central bank Governor in the various deliberations of the G-20, where Finance Ministers and central bank governors meet and take decisions," Mukherjee said.
Subbarao was to retire in September following the completion of a three-year term. "The Prime Minister approved the extension to D Subbarao, Governor of RBI, for two years," a PMO spokesman said.
The 61-year-old former IAS officer, who had also served as Finance Secretary, was appointed the 22nd Governor of the central bank in September, 2008.
The continuation of Subbarao at the helm of the RBI assumes significance as it comes at a time when the government and the central bank are gearing up to meet the challenge posed by the economic crisis in several eurozone nations and the downgrade of the US sovereign rating to AA+ from AAA by Standard and Poor's.
The downgrade triggered a steep fall in stock markets throughout the world, including the BSE and NSE in India.
Subbarao, who steered the country through the economic crisis of 2008, is credited with taking a tough monetary stance to check inflation.
It was under his leadership that the RBI increased key interest rates 11 times in the past 16 months to control the rate of price rise, despite stiff resistance from industry.
Under his governorship, the RBI had doubled the frequency of monetary policy reviews from every quarter to eight times a year with a view to decrease the need for off-cycle rate moves.
Subbarao had earlier served under Manmohan Singh in the Finance Ministry as a senior official in the early 1990s, when the latter was Finance Minister. Prior to this appointment, he was the country's Finance Secretary.