Renault and Nissan are joining forces with India's Mahindra & Mahindra to build a new $900m (£458m) car plant in the city of Madras (Chennai).
Mahindra sees its future in the mainstream car market
Mahindra, India's fourth-largest car firm, will own 50% of the venture with its partners controlling the rest.
Production is expected to start in 2009 and the plant will ultimately be able to turn out 400,000 cars a year.
Foreign firms have flocked to India because of the economy's strong growth and low costs.
Both Ford and Hyundai have already opened plants in Madras (Chennai).
Renault and Mahindra already own a joint venture operation in the western state of Maharashtra, producing the Logan model.
Madras (Chennai) is the centre of India's fast-growing car industry, with BMW set to follow Ford and Hyundai by setting up there.
Car sales have grown dramatically since the late 1990s and the number of vehicles made in India is expected to top the two million mark by 2010.
"Nissan was able to evaluate several different options for our first manufacturing base in India but the advantages of working with our alliance partner and its local Indian partner was compelling," said Carlos Tavares, Nissan's executive vice-president.
Renault and Nissan have a global alliance covering sourcing, production and marketing. The two firms own shareholdings in each other.
Mahindra has recently been looking to expand its share of car sales, having for many years focused on the truck and utility vehicle sector.