The joint venture will see Mahindra and Mahindra, a subsidiary of the Mahindra Group, will hold a 51% stake in the car venture while Renault will hold 49%, both companies said in a joint statement.
The estimated cost of the project is $165m (£87m) with an initial aim of producing 50,000 cars per year, the partners said.
"For Renault, entering the Indian market constitutes a major step in its international development," the statement said.
Logan will be marketed under the brand of Mahindra Renault. Production is to begin in the first half of 2007.
India will become the sixth country for production and distribution of the Logan, after Romania, Russia, Morocco, Colombia and Iran.
The budget car was developed by Romanian car maker Dacia and its parent company Renault.