The factory, in the southern state of Andhra Pradesh, is a fillip for Prime Minister Narendra Modi, who has championed a campaign to turn India into a manufacturing powerhouse to boost economic growth and create much-needed employment.
India is the world's fastest growing smartphone market, but so far a lack of good suppliers and infrastructure have hampered efforts to manufacture phones in the country, forcing most of India's more than 100 different phone companies to import from China and Taiwan.
From Monday, the south Indian assembly line will roll out Xiaomi's first locally made smartphone, the Redmi2 Prime, an India-specific upgrade to its best-selling Redmi2 budget smartphone. It will be sold at 6,999 rupees ($109.58), company executives said.
Neither Xiaomi nor contract electronics maker Foxconn disclosed the size of their investment or future production capacity.
The Indian market, which Xiaomi entered in July 2014, has fast become its second-largest, as the company's low-priced phones find favor with young and cost-conscious customers.
In the April-June quarter, Xiaomi ranked seventh in terms of smartphone shipments in India -- a segment that is dominated by Samsung Electronics Co Ltd and India's Micromax Informatics Ltd, according to Counterpoint Research.
Manu Jain, Xiaomi's India head, said that apart from bringing tax benefits, the new facility would help the company better manage inventory and reduce lead times from three to four weeks to under two weeks.
"Over time, most Xiaomi phones sold in India will be made in India," Jain said, though that could take some time given the lack of development of the local supply chain.
Xiaomi, battling slowing sales in China, is betting on emerging markets such as India and Brazil, where it began manufacturing in late June, to fuel growth.
The number of smartphone users in India stood at around 140 million in 2014. It is expected to reach 651 million by 2019, according to a study by Cisco.
The assembly line marks a return to India for Foxconn, officially known as Hon Hai Precision Industry Co. The world's largest contract electronics manufacturer was forced to shut up shop in Asia's third-largest economy last year after client Nokia stopped making phones at its plant.
As individual Indian states increasingly vie for investment, Monday's opening is also a victory for Andhra Pradesh and its charismatic leader N. Chandrababu Naidu, who oversaw the development of tech hub Hyderabad, now in a different state.
Foxconn, a key supplier to Apple Inc, has been among the firms making the most of Indian states' newfound competitive streak. It signed a $5 billion investment deal with the western state of Maharashtra on Saturday.