"Despite the provocations we have faced constantly from terrorists whose linkages we have traced back to Pakistani soil, we have not abandoned the path of dialogue," Rao said in an address on Monday at the Woodrow Wilson Centre, a renowned Washington think tank.
Rao said that Pakistan's lack of concern against the terror outfits in the country has always been a matter of concern for India.
"India, too, is concerned at the terror infrastructure that has been allowed to be established, take root and be used as an instrument of state policy in our immediate neighbourhood."
"Our heartland, our cities and our people, are exposed to the threat of terrorism in a constant and almost unremitting way in a manner that the United States well understands, given the similar threats that are directed against the American people," she said.
Warning against taking its restraint for weakness, the Foreign Secretary said that India still has the capacity to deal destructive designs directed towards it effectively.
"However, our restraint should not be confused with weakness or unwillingness to act against those that seek to harm our people, create insecurity, and hamper our developmental goals," she said.
"We are a strong country and we possess the capacity to deal effectively with those that pursue destructive agendas against India and its people," Rao warned.
"Despite the brazen and malignant nature of the threats we face, India has made several genuine efforts to restore trust and confidence," she said.
"We have, time and again, made genuine attempts to address outstanding issues, most importantly, the issue of terrorism through dialogue with Pakistan," Rao said referring to her recent meeting with Pakistan Foreign Secretary Salman Bashir as the latest such move.
Rao said that the composite dialogue was resumed after assurance from the then Pakistani leadership in Jan 2004, but Pakistan failed to keep up its promise.
"Today, Pakistan claims that it is in no position to give us such a guarantee that terrorism can be controlled by its authorities."
"In such a situation, the people of India who are already bitterly affected by the series of terrorist attacks directed against them, can hardly be expected to support the resumption of a full-blown Composite Dialogue with Pakistan," she said.
With regard to US military aid to Pakistan, Rao asked for stricter accountability criteria to suppliers of military aid to Pakistan.
"It is also important that there are strict accountability criteria that apply to defence assistance rendered to Pakistan for operations against terrorists and insurgents on the border with Afghanistan".
"India's past experience regarding such assistance has taught it to be vigilant to the possibility of it being used for purposes that generate tension and hostile actions against India," she said.
"India does not have aggressive designs against Pakistan and we want it to be a stable and prosperous country," Rao said. "But we will be vigilant about our security. That is our sovereign right," she asserted.