59-year-old Singh, a 1976 batch IFS officer, was in close contention for the top job along with India's Ambassador to China S Jaishankar, who is a batch junior to her. His name was doing the rounds because of his excellent service record particularly as envoy to China.
Due to retire in July next year, Singh will now have a two-year extension and will succeed Ranjan Mathai whose tenure will end on July 31.
Singh is the wife of former Secretary (East) Sanjay Singh, who retired in April this year.
There were reports that she along with other diplomats who are senior to Jaishankar were contemplating resignation in case of his elevation. Finally, the Prime Minister opted for seniority. Her name was cleared after the Prime Minister returned from his Kashmir visit last week.