The company -- also called Apple of China -- has already partnered Amazon Web Services (AWS) to migrate data of its international (non-Chinese) customers to centres in the US and Singapore. The process is expected to be completed by the end of this month.
"We are already in discussions with local data centre operators here. We expect to have one in place by early next year.
These efforts help significantly improve the performance of our services and also provide some peace of mind for users in India, ensuring that we treat their data with utmost care and the highest privacy standards," Xiaomi Vice President Hugo Barra said.
He added that the decision to set up a data centre in India was driven by the strong demand that Xiaomi has seen in the last few months.
"At the beginning of 2014, we knew that we will add India (data centre) but what would determine that would be the progress that we made here. The growth that we have seen here is beyond our expectations.
Xiaomi entered the Indian market in July this year with its Mi3 smartphone priced at Rs 13,999 through e-Commerce major Flipkart. It currently has another device Redmi 1S in the country. It is estimated that the firm has sold about half a million Redmi devices and 1.2 lakh Mi3 handsets.
"The potential that we see in India played an important part in the decision. The smartphone market here has grown at a phenomenal pace and is the second largest market for us outside of China. With 4G coming in, we want to offer the fastest service possible and bringing the data centre closer to the users is a step in that direction," Xiaomi India head Manu Jain said.
The move will also help the Chinese firm address concerns around security of user data. Last week, the Indian Air Force had asked its IAF personnel and their families to desist from using Chinese 'Xiaomi Redmi 1s' phones as these are believed to be transferring data to their servers in China and could be a security risk.
The company is now engaging in discussion with Indian authorities to address these concerns.
"We are trying to get to the bottom of this. So far, we have not heard anything from the IAF or any other authorities and have only read media reports. We will reach out to authorities and engage with them to address any concerns that they might have," Barra said.
Countries across the world are putting in place regulations to ensure that data is hosted within the country and this will gain traction as more data moves to the cloud.