The winner is expected to be announced in November, The Times of India reported
Defense Minister A. K. Antony, who is chairman of the Defense Acquisitions Council, made the announcement. He said the council approved the offsets evaluation reports of the Eurofighter Typhoon -- backed by EADS that includes British, Germany, Spanish and Italian companies-- and the French group Dassault's Rafale jet.
The announcement signals the final stage of the controversial competition that has seen India reject bids from four other major fighter manufacturers.
India is in "the last lap" for making a decision, Air Chief Marshal Norman Anil Kumar Browne said.
"In the middle of November, we shall be able to announce to the whole world which plane we have selected," he said.
India is hoping to have the plane operational by 2015.
India also evaluated proposals for the F/A-18E/F Super Hornet from Boeing, Lockheed Martin's F-16, the Russian-made MiG-35 and the Gripen from Swedish firm Saab.
DAC began evaluating all the proposals in April, looking at each bidder's value-for-money tender, although trials of the aircraft began last year.
The U.S., Russian and Swedish bids eventually were rejected after technical evaluation and field trials, The Times of India report said.
Indian media reported in April that one unnamed bidder had made a final pitch to upgrade its offer but the DCA rejected any last-minute changes to bids.
"No offers for upgrades or changes in the original bid submitted by the six aircraft companies would be allowed as their aircraft have been judged on the basis of capabilities offered in the original bid and their performance in the field trials," an unnamed air force source said at the time.
Many of India's nearly 800 fighters are aging Soviet-era and Russian aircraft, including the Mikoyan-Gurevich MiG-21, MiG-27 and MiG-29 and some Sukhoi Su-30MKI planes. The air force also has Anglo-French SEPECAT Jaguar and French Mirage 2000 aircraft produced under license.
The MRCA deal is imperative for the air force because of the age of its largest aircraft by numbers, the MIG-21, a 1970s fighter.
The long-awaited aircraft deal -- the tender was issued in August 2007 -- will be one of India's largest capital military expenditures likely in the next several years.
The purchase is reflected in the country's boosted defense budget, announced earlier this year -- an increase of more than 11 percent in the face of China's growing military might.
The jump to $36.5 billion for 2011-12, from $32.74 billion, includes a 12 percent boost in capital spending for equipment and services.