"As India's online retail market develops, the idea is that Paytm will be the market leader in online and mobile payments, so Ant Financial would profit from the market's growth," said Neil Flynn, portfolio manager at Alcuin Asset Management.

Han Xinyi, vice-president of Ant Financial, noted in a statement that India has a population of more than 1 billion. "The potential of its untapped payment market is huge. With smartphones rapidly penetrating into Indian people's daily lives, we see great opportunities in mobile payment."

And through the investment by Ant Financial in Paytm, Alibaba will benefit from the development of the country's online retail market.

As the Paytm system becomes more popular, it will be easier for Alibaba to launch its business-to-consumer platform Tmall in India, said Flynn.

Analysts said that the Indian online retail market can be compared with that of China 15 years ago, in terms of demographics, income inequality and consumption habits.

Will Tao, an analyst at market research firm iReseach Consulting Group, said it makes sense for Alibaba to expand into emerging markets, which offer much better opportunities and larger profits than mature markets.

Alibaba is not the only e-commerce giant moving into the Indian market. For example, United States-based Amazon.com Inc launched an online shopping site in India in 2013.

But Tao said it is possible for Alibaba to compete with Amazon in India.

"The Chinese e-commerce company has the financial resources and the technology to replicate a similar success in India," he said.

Emma Gonzalez Miguel contributed to this story.