India is setting up a satellite tracking and imaging centre in southern Vietnam that will allow it to observe the area, which includes China and the South China Sea, from space.
Although the move may strengthen diplomatic relations between Vietnam and India, it could anger the Chinese government.
The new centre is billed as a civilian facility; earth observation satellites typically have agricultural, scientific and environmental applications.
However, security experts said improved imaging technology meant the pictures could also be used for military purposes.
"The advance of technology means the lines are blurring between civilian and military satellites," said Trevor Hollingsbee, a retired naval intelligence analyst with Britain's Defence Ministry. "In some cases, the imagery from a modern civilian satellite is good enough for military use."
In return for permitting the construction of the facility on its soil, India will allow Vietnam access to images acquired from the satellites, an Indian government official connected with the space programme has said.
"This is a sort of quid pro quo which will enable Vietnam to receive IRS (Indian remote sensing) pictures directly, that is, without asking India," the official said.
"Obviously it will include parts of China of interest to Vietnam."
Vietnam has reportedly been looking for advanced intelligence, surveillance and reconnaissance technologies in recent times due to rising tensions with China over the disputed South China Sea.
"In military terms, this move could be quite significant," said Collin Koh, a marine security expert at Singapore's S. Rajaratnam School of International Studies. "It looks like a win-win for both sides, filling significant holes for the Vietnamese and expanding the range for the Indians."
There is currently no timeframe for when the new facility will become fully operational, but it is estimated that it will cost the Indian government around $23m (£16m).