Obul Reddy's family has sent a legal notice to Varma for allegedly showing him in poor light.
The director, on the other hand, has issued a statement insisting that he does not fear such threats.
"Even if Obul Reddy returns as a ghost, I will not be afraid," he said.
Allged rival groups killed Obul Reddy in Hyderabad in the 1990s.
RGV's upcoming movie, Raktacharitra, is said to be a story of a factional feud between slain TDP MLA Paritala Ravi and Maddelacheruvu Suri, both belonging to Anantapur district.