"At some point we will need a replacement for the Alto. That price range is the entry level for Indian customers today, so we can't leave that segment open," R.C. Bhargava, the Indian firm's chairman said.
The car would cost almost double the price of Tata Motor's Nano which is the worlds cheapest car.
Volkswagen has bought one fifth of Suzuki for $2.5 billion giving them access to Japans small car expertise and Suzuki's dominance in India, helping VW aim to be the worlds number one manufacturer.
Expected to cost twice as much as Tata Motor's Nano which is the world's cheapest car, the new car is expected to cost $4,000-$5,000 which is below the price of VW's Up which is the cheapest car in the VW showroom costing $8,800 in the European market.
"Volkswagen will be greatly interested in a car below the price segment of the Up ... and that is something we will need to check in our future together with Suzuki," Fabian Mannecke, a Volkswagen spokesman said.