Former England international James will replace ex-Manchester United coach Rene Meulensteen, who left the club on Tuesday following a poor run of results.
James last played for Kerala in 2014 and made 12 apparances for the Kochi-based club, who are co-owned by Indian cricket icon Sachin Tendulkar.
Interestingly, the 47-year-old becomes the fourth England-born head coach in the league after Jamshedpur's Steve Coppell, ATK's Teddy Sheringham and Chennaiyin's John Gregory.
Kerala Blasters currently sit eighth in the 10-club Indian Super League table after seven games played. The club signed former Tottenham and Manchester United hero Dimitar Berbatov for the current campaign, but the Bulgarian is goalless after four matches. James will also be managing old England team-mate Wes Brown.
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