The cartoon, published in Delhi's Mail Today earlier this week, portrays an Australian police officer in a white hood as a member of the Ku Klux Klan, saying: "We are yet to ascertain the nature of the crime".
Australia's acting Prime Minister Julia Gillard told reporters in Brisbane that she hadn't seen the cartoon, but believed it would be "deeply offensive", The Age reported Friday.
"Any suggestion of the kind is deeply offensive and I would condemn the making of such comment," the paper quoted her as saying.
"The Victoria police have stepped up and increased policing in difficult hot spots in Victoria where they have seen a number of violent incidences," she said.
The caricature was in response to Victoria police stating that it was unclear yet if the murder of 21-year-old Indian student Nitin Garg in a West Footscray Park was racially motivated.
According to them, the attacks could be random acts by opportunistic criminals.
India has dismissed Australia's contention that the Indian reaction over the issue of attacks was "hysterical," and asked Canberra to step up measures to ensure security of Indian students.
Earlier Victoria Police Association secretary Greg Davies said the cartoon was "a kick in the guts" for investigating officers, the paper said.
"It will undoubtedly inflame some people in India and it will undoubtedly inflame some people here in Australia, but our people will keep their eye on the ball and they'll get the job done," he told radio 3AW, according to the paper.
Victorian Police Minister Bob Cameron dismissed the cartoon as "outrageous" and said, "We are a tolerant place and Victorian police are very tolerant and this business about racism is just wrong."
A caller, Molly, told 3AW, "I’m absolutely bloody furious. It’s about bloody time the hundreds of thousands of Indians living safely and comfortably and successfully in our country stood up for us."
According to the paper, international fallout from the murder of Nitin Garg has spread well beyond India, with media outlets in Asia, the Middle East, North America and Europe reporting the trouble in Australia.