Modi met Rajoy at the Moncloa Palace this morning in the first engagement during his stay in the Spanish capital today.
External Affairs Ministry spokesman Gopal Baglay termed the meeting a "fresh impetus to a multifarious relationship".
Modi called for boosting bilateral cooperation to fight terrorism as "both our countries have faced the security challenge."
Spain, the summer holiday destination of Europe, in a recent government report said that the Islamic State group "has been publishing in Spanish, which means an increase in the risk of its influence on radicals living in our country".
The prime minister praised the Spanish president saying under Rajoy's leadership the country has undergone economic reforms "which is also the biggest priority of my government."
He said railways, smart cities and infrastructure sectors were the priority areas for India and Spain has "enough skills and mastery" to contribute to India's requirements.
Modi said he is confident that his visit to Spain - the first by an Indian prime minister since 1988 - will give a new momentum to bilateral ties.
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