The Premier League outfit is expected to submit a bid worth up to £30 million to secure the Swiss international's services, Jeremy Wilson of The Telegraph reports.
Arsenal hoped a £25-million bid would suffice, but Gladbach's valuation of the 23-year-old is closer to £35 million.
Manager Arsene Wenger is said to be eager to complete the signing as early as possible as he looks to address a need for a central midfielder.
Although the likes of Jack Wilshere, Santi Cazorla, and Aaron Ramsey are expected to play important roles up the middle of the pitch, the expected departures of Mikel Arteta, Tomas Rosicky, and Mathieu Flamini should help the Gunners avoid issues when it comes to playing time.
Xhaka, however, is expected to compete with Francis Coquelin as the defence-minded midfielder is capable of playing a deeper role.
Despite his age, Xhaka has been regular fixture in the Swiss national team and will add to his 39 caps when he competes at the European Championship this summer in France.
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