A federal agency is probing allegations that Rolls-Royce paid bribes for supply of aircraft engines.
Rolls-Royce said it would "cooperate fully" with Indian authorities.
The company is the world's second biggest manufacturer of aircraft engines.
India's defence ministry had put on hold all "existing and future" contracts with Rolls-Royce pending the results of an investigation by the country's Central Bureau of Investigation (CBI) into the purchase of jet fighter engines in a deal worth $1.6bn (??960m), the Press Trust of India (PTI) reported.
The Rolls-Royce engines were supplied to the state-run Hindustan Aeronautics Limited (HAL) between 2007 and 2011, reports said.
"There was an internal vigilance report [by HAL] that suggested there were discrepancies in the deal. The CBI will look into that," the AFP news agency quoted a defence official as saying.
A Rolls-Royce spokesperson said the company would cooperate with the inquiry.
"We await clarification from the authorities in India. We have made clear that we will cooperate with the regulators and have been explicit that we will not tolerate misconduct of any sort," the spokesperson told the BBC.
Rolls-Royce said last year that the UK's Serious Fraud Office (SFO) was investigating allegations of possible bribery in China and Indonesia.
Last month, two people were arrested in London as part of an SFO investigation into the firm's activities in Asia.
The office said at the end of last year it had opened a formal investigation into the engine maker about bribery and corruption in overseas markets.
The Rolls-Royce probe is the latest controversy to hit India's defence purchases.
In January, India cancelled a helicopter deal with Italian defence giant Finmeccanica after allegations of corruption.
India's governing Congress party has been hit by a series of damaging corruption scandals in recent years and the opposition has made regular calls for Prime Minister Manmohan Singh to resign.
India has put on hold all deals with Rolls-Royce until it completes an investigation into bribery allegations against the Britain-based company, the Press Trust of India news agency said.