The group displayed the compact 'RE60' at a presentation in New Delhi, stressing the car's high fuel efficiency and low carbon dioxide emissions, but it did not release a price tag.
"At Bajaj Auto, we believe the people of the planet deserve much better, much faster," said Rajiv Bajaj, managing director of the group which is best known for its motorbikes and three-wheelers.
The 200cc vehicle which is set to enter the same segment of the market as the world's cheapest car, the Indian-made Tata Nano will do 35 kilometres per litre of fuel and emits just 60 grammes of carbon dioxide per kilometre.
Bajaj said that "the vehicle's emissions were typically half of what the small cars currently emit in our market."
"The main customers targeted are drivers of three-wheeled motor-rickshaws, but also anyone else who wanted to take it home once it goes on sale some time this year," Bajaj said.
The narrow four-seater car will do a top speed of 70 kilometres an hour and weighs just 400 kilogrammes, with Baja stressing that it had been designed specifically for urban commuters.
India has become a centre of small car design, engineering and production, with demand for cheaply-made cars booming as millions gain middle-class status each year.
The Tata Nano was launched in 2009 and costs as little as 140,880 rupees ($2,770) for the no-frills model.
Earlier in 2011, Bajaj abandoned a joint project with France's Renault and its Japanese partner Nissan to develop a low-cost car.