"Further to reports in the media that I made a racist remark to a fourth official last year, I wish to categorically deny that allegation," Houghton said in a statement, responding to reports about a friendly against Yemen last year.
The All India Football Federation discussed the issue surrounding the well travelled English coach at its executive committee meeting earlier this week.
"The Executive Committee... expressed its unhappiness regarding the conduct and derogatory remarks made by Bob Houghton. The Executive committee has unanimously decided to seek legal opinion regarding its course of action," the AIFF said in a statement.
Houghton said he had coached teams in China, the United States and Uzbekistan, among other places, and never faced such "nonsensical" allegations.
Local media claims the AIFF wants to sack Houghton, who took over the coaching reins in 2006 and has a contract till 2013.
India captain Baichung Bhutia and striker Sunil Chhetri have already vouched for the coach.
"I think it is patently unfair to accuse him of being a racist," Chhetri was quoted as saying in Saturday's Hindustan Times newspaper.
Bhutia said: "Bob can't say such things against anyone. I was there during the match. I am playing under him for the past three years and can assure that Bob is not racist."
