Rao, on a visit to Colombo, told President Mahinda Rajapakse that the defeat of Tamil Tiger separatist rebels last year could lead to a lasting solution to decades of ethnic conflict.
Sri Lanka had "a historic opportunity to initiate a process of political reconciliation where all communities in Sri Lanka can live in peace and harmony," Rao said in a statement.
Rajapakse came to power in 2005 promising to address Tamil demands for greater autonomy, but he later ordered the massive military offensive that crushed the Tigers.
Since then, the president has publicly committed himself to reconciliation though he has yet to implement recommendations of an all-party panel he set up to address grievances of the ethnic Tamil minority.
Rao also welcomed Sri Lanka's moves to grant freedom of movement to tens of thousands of war-displaced Tamil civilians who were held in military-run camps.
India, with its large Tamil population in the southern state of Tamil Nadu, shares close cultural and r