Chandigarh: Chasing 180 to win, RR were 56 for 1 in eight overs at one time and the match looked nicely poised but Dhawan's strikes in the next over put the visitors into a state from which they never recovered.
Both batsmen lost their stumps to in-swinging deliveries. IPL debutant legspinner Karanveer Singh then got in on the act and accounted for Stuart Binny and Sanju Samson to put things beyond RR. Brad Hodge, who took 22 runs off the 17th over bowled by Beuran Hendricks, made 31 off 18 balls and James Faulkner scored 35* off 13 balls but despite their efforts RR could only go as far as 163 for 8 .
Akshar Patel was the pick of the KXIP bowlers with figures of 3 for 24, Dhawan and Karanveer returned 2 for 25 and 2 for 16 respectively.
RR's start to their chase wasn't also good as Karun Nayar fell to Laxmipathy Balaji in the third over for 11. Rahane and Samson looked good in their brief stand of 35 but Rahane's wicket opened the floodgates for the hosts.
RR's defeat means Mumbai Indians, who defeated Delhi Daredevils earlier in the day, and Sunrisers Hyderabad are still in the play-off fray. That way Watson's men's sixth defeat has given the remaining four matches in the league stage a lot of meaning.
Earlier, George Bailey and David Miller added an unbeaten 60 off 32 balls for the fifth wicket to take table-toppers KXIP to 179. Shaun Marsh top-scored for KXIP with 40 off 35 balls, hitting five fours and a six.
After RR put KXIP in to bat, Virender Sehwag once again got off to a good start but failed to turn it into a big innings. After hitting Vikramjeet Singh Malik for a six and two fours in the first over of the match, he typically got carried away and gave away his wicket to James Faulkner for 18 in the third over. The ball got big on the former Delhi Daredevils captain and induced a leading edge; Malik took a good running catch at mid-on.
Manan Vohra made a big impact hitting Watson for a four and a six in the fourth over and looked good for a big score but his lethargic running between the wickets came in the way as a direct throw from Binny from deep mid-wicket ended his innings on 25.
Wriddhiman Saha joined Shaun Marsh and both added 59 for the third wicket before Marsh, who was retained in the team at the expense of the big-hitting Glenn Maxwell, found Rahane at long-on off the bowling of Malik.
There was a 10-minute rain delay and not long after play resumed Saha held out to Rahane at long-on off the bowling of Rahul Tewatia, who replaced Ankit Sharma for this match.
After Saha departed for 27, Bailey (26* off 18 balls) and Miller (29* off 20 balls) combined to take the hosts to a formidable total. The 19th over bowler by Faulkner yielded 23 runs. Faulkner, Tewatia and Malik took one wicket each.
Kings XI Punjab - 179 for 4 (Marsh 40)
Rajasthan Royals - 163 for 8 (Faulkner 35*, Hodge 31, Samson 30)
Result - Kings XI Punjab won by 16 runs
Points - Kings XI Punjab 2, Rajasthan Royals 0