"The trajectory of our relationship over the last few decades has been distorted and adversely impacted by the factor of cross-border terrorism," Rao told a large gathering at the International Institute for Strategic Studies here.
Describing the recent talks with her Pakistani counterpart Salman Bashir in Islamabad as "productive and positive", she said, "A stable Pakistan which acts as a bulwark against terrorism and extremism is in its own interest and also in the interest of our region."
"We have consistently made efforts to go back to the negotiating table to solve difficult issues. We have striven to promote better relations with Pakistan. Naturally, such relations can only grow in an atmosphere free of terror and violence," she said yesterday.
Referring to China, Rao said: "We have consciously practised a policy of engagement that has yielded positive dividends. Although, there is an unresolved boundary question which should be settled on mutually acceptable terms, we have not held the rest of the relationship hostage to this complex issue. We have also collaborated on a variety of multilateral issues."
Speaking on 'Key Priorities for India's Foreign Policy', Rao said: "it is an amalgam of national interests, our conviction that inclusive structures of dialogue and cooperation to address the new dimensions of security threats are necessary, that the institutions of global governance including the United Nations should reflect current realities."
On Sri Lanka, Rao said, "The end of the civil war has brought historic new opportunities for reconciliation between the Tamil and Sinhalese people and for the reconstruction, rehabilitation and economic development of the Northern and Eastern Provinces."
"Mahatma Gandhi called Sri Lanka the nearest neighbour to India. It is through that prism that we see our ties with this island nation."
She said that India has played an important role at several international platforms.
"India has strongly supported the process of reform and restructuring of the UN to make it better equipped to effectively respond to an era of transformational change in global affairs," she said.
India along with Brazil, Germany and Japan (together known as G-4 countries) have proposed expansion of the Security council from the current 15 to 25 members, with the addition of six permanent and four non-permanent members.
She said India has committed its full support to international anti-piracy efforts.
An Indian naval ship deployed in the Gulf of Aden has successfully thwarted several piracy attempts and provided security escort to several merchant ships in these waters.
Referring to the tragic incident at the Fukushima Daichi Nuclear Power Plant in Japan, she said it has raised worldwide concerns about the safety aspects of nuclear power.
"The lessons learnt from the Fukushima incident will be useful for the global nuclear power industry. At the national level, India is taking measures to reassure our people about the safety of our nuclear power plants, including technical review of safety of our plants and strengthening the safety regulatory framework," she said.
She admitted that for a country like India, with one of the smallest carbon foot-prints in the world, the first and overriding priority is to pursue economic development, to alleviate poverty and to address severe energy deficit.
"Half a billion people in India still need to be given access to commercial energy," she said, adding any international agreement will, therefore, have to be sensitive to the enormous challenges India face in bringing the benefits of growth to the poorer sections of its population.