On the eve of the talks, Pakistan sought to link the Samjhauta Express blast case to the Mumbai attack trial but this was promptly rejected by India.
Pakistan said India "needs to bridge the gap between what it says and what it does" juxtaposing New Delhi's slow handling of the 2007 Samjhauta blast case with its insistence on a quick trial for the Mumbai attack accused.
India hit back, saying the two cases were not comparable, and there were clear leads in the Mumbai incident unlike in the cross-border train attack case.
India is going for the "exploratory" talks with "cautious optimism" and "reasonable expectations" and expressed its willingness to discuss all outstanding issues with Pakistan, but by a step-by-step approach.
Rao and Bashir, who are here for the SAARC meeting of Foreign Secretaries and Council of Ministers, are expected to discuss the problem of terrorism that is plaguing the relationship, besides some confidence-building initiatives concerning fishermen, people-to-people contacts and trade and commerce.
This will be the first meeting between the foreign secretaries since the last one in Pakistan in July last year which ended in a failure.
"Our attempt is to unlock the dialogue process and find the right path to move ahead," sources said while pointing out that India has been trying so even after the Mumbai attacks.
Pakistan gave clear indications today that it will rake up the Samjhauta issue at Sunday's meeting.
The Indian side said it is ready for this but it does not want to pre-judge whether it would upset the talks. India is also expecting Pakistan to raise the Kashmir issue.
On its part, India would strongly take up the issue of cross-border terrorism and seek an update on the Mumbai attacks case and efforts, if any, made by Pakistan to dismantle the terror infrastructure.
"During a dialogue, both sides raise the issues of concern to them. Surely, Pakistan will raise issues that concern it, we will raise issues that concern us," the sources said.
They made it clear that India, as declared by Prime Minister Manmohan Singh, is willing to discuss all outstanding issues with Pakistan in a step-by-step manner if its concerns on terrorism are addressed.
"We are clear that dialogue is the best way forward. So we need to engage Pakistan and we are doing so," the sources said.