Duvvuri Subbarao has been appointed the new central bank chief to replace Yaga Venugopal Reddy, who retires later this week on September 5.

"The government has decided to appoint D Subbarao as the next governor of RBI", finance minister, P Chidambaram told reporters. This decision comes at a time when Asia's third-largest economy is battling high inflation at 12.40 percent.

The one-time senior World Bank economist will serve the post for three years. He may, however, be considered for reappointment for another two years, as the RBI Act provides for appointment of a governor for a period of up to five years.

The new RBI chief, who currently holds the top civil service job in the finance ministry, will have to wrestle down inflation from its high present levels.

Mr. Subbarao is expected to pursue the same hawkish policy against inflation as Reddy. Mr Reddy's tough but sure handling of monetary policy has served India well in these times of global financial instability.

Subbarao once described inflation as "the king of tax on the poor" and has called hiking interest rates the "obvious" response to cutting inflation.

Mr Subbarao served as the secretary to the Prime Minister's Economic Advisory Council headed by Dr C Rangarajan before he was appointed as finance secretary in 2007. He topped the civil services batch of 1972, as he did in most exams during his academic career, and worked in Andhra Pradesh, including a stint as finance secretary there.

Subbarao must "steer us through this difficult time" in which inflation must be tamed without allowing growth to stall, said Amit Mitra, Secretary General of the Federation of Indian Chambers of Commerce and Industry. India's $912 billion economy grew 7.9 percent in the three months till June 30, the slowest pace since 2004.

RBI deputy governor Rakesh Mohan was also amongst those in active consideration for the post.