The singer was among a host of stars who were recognised for their services.
He said: “Initially I felt a mixture of surprise, humility, joy and a bit embarrassed but after thinking about it, I accept this for my family and fans as well as everyone who has inspired me to write.”
Davies previously received a CBE from the Queen in 2004.
The band, centred around Davies and his brother Dave, who sold millions of records over more than 30 years. They split up in 1996.
They were inducted into the Rock and Roll Hall of Fame in 1990.
Ray Davies briefly joined his brother on stage during a gig at Islington Assembly Hall in December 2015, which sparked a few rumours about the band reforming.
Davies later addressed the semi-reunion. “I’m still trying to live that down. I joined him on stage briefly but it would be overly romantic to think it was because of the show or to start talking about a reunion,” he said.
Actor Mark Rylance has also received a knighthood for services to theatre. He won the best supporting actor Oscar earlier this year for Bridge Of Spies. He also had a Bafta-winning role as Thomas Cromwell in the 2015 BBC Two mini-series Wolf Hall.
Welsh opera singer Bryn Terfel has also been knighted for services to music.
Former Spice Girl Victoria Beckham has been honoured with an OBE for services to the fashion industry. Her husband David Beckham was honoured with an OBE 13 years ago.
Meanwhile, actress Naomie Harris, who plays Moneypenny opposite Daniel Craig’s James Bond has been honoured with an OBE.
Over 1,197 people were included in the New Year Honours List.
Goldie, Damon Albarn and Idris Elba all received awards in the last New Year Honours list.