In signing the deal, he will forego a place in the IPL player auction on February 12 and he joins former New Zealand captains Stephen Fleming (Chennai Super Kings) and John Wright (Mumbai Indians) as IPL franchise coaches.
Vettori replaces South African Ray Jennings after RCB missed the IPL semifinals and subsequent qualification for the Champions League for the past two seasons.
However, frustration is brewing for Vettori, who turns 35 later this month. He has recovered from Achilles tendon surgery in June only to suffer a back strain during a recent lifting exercise at home. He has already undergone three painkilling injections in the lumbar region and is nearing the end of his pain threshold trying to play for the Brisbane Heat in Australia's Twenty20 Big Bash League.
As he struggled through four overs against the Sydney Thunder last week television commentators suggested he had "bottle tops in his boots" in reference to his hobbling between overs. In spite of the pain, Vettori has recorded respectable statistics of five wickets at 24.60 at an economy rate of 6.15 runs per over in five matches.
The BBL provides lucrative income but Vettori has also been testing his body to see if it can stand the rigours of international play. Playing for New Zealand this summer and on until next year's World Cup appears increasingly unlikely.
If Brisbane don't make the semifinals, Vettori will return home in a fortnight and the discussions on his future will begin. A seminal meeting will be held between Vettori, New Zealand captain Brendon McCullum and coach Mike Hesson within the next month to decide his future.
As recently as November, New Zealand Cricket indicated they wanted Vettori back across all forms. Tellingly, the naming of the test team against the West Indies was pushed out to incorporate Vettori's Plunket Shield match for Northern Districts against Central Districts. It was just his second first-class match in 16 months and followed a six-wicket haul against Auckland.
Vettori, who has 360 wickets from 112 tests and the country's most ODI wickets (284), turned down an NZC contract in July.
The RCB contract is Vettori's first foray into coaching outside what was termed an 'assistant coach' stint with the Heat last season. He is looking to play internationally until at least the 2015 World Cup but the coaching decision signals his first steps - outside shareholdings in several businesses - beyond playing cricket since making his test debut almost 17 years ago.