Bailey was bought by KXIP for Rs 3.25 crore during the players' auction in Bangalore last month.
Bailey replaces another Australian, Adam Gilchrist as the captain. Gilchrist announced his retirement from IPL last year.
This year, KXIP have Virender Sehwag in the side. The opener was bought in the auction. KXIP could have opted for Sehwag as the leader but have gone against it and said Bailey was a "unanimous" choice.
IPL 7 starts in the United Arab Emirates (UAE) on April 16.