Renault-Nissan has announced a joint venture with Indian firm Bajaj to produce a $2,500 (£1,276) car.
The vehicle, so far known only as Codename ULC, will cost about the same as Tata Motors' Nano - which it has claimed is the world's cheapest car.
India will be the ULC car's main market with 400,000 to be made each year in a factory in Chakan, Maharashtra state in the west of the country.
Bajaj is the second-biggest maker of motorbikes in the country.
No details of the new car have been released, though production is expected to begin in 2011.
Environmental worry
The Nano has captured the imagination of many people in India - making it a realistic prospect for some people who had previously not been able to afford to buy a car.
The four-door five-seater car, which goes on sale later this year, has a 33bhp, 624cc, engine at the rear.
It has no air conditioning, no electric windows and no power steering, but two deluxe models will be on offer.
India's domestic car market is predicted to boom in the coming years on the back of the country's fast-growing economy and increased consumer wealth.
Indian car sales are predicted to more than quadruple to $145bn by 2016.
However environmental critics have said that the car will lead to mounting air and pollution problems on India's already clogged roads.
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