The midfielder had a successful loan spell at The Madejski Stadium earlier this season, and The Royals have offered £100,000 for the 28-year-old.
However, that bid falls short of Rotherham's £200,000 valuation of Watson with Millers boss Ronnie Moore keen to hang on to his skipper.
Reading, though, believe they have made a fair offer for Watson and are still optimistic of capturing him on a permanent basis.
"Yes, we made a bid," Reading's chief executive Nigel Howe told the club's official website.
"We understand that his future at Rotherham is in doubt. It's well known that we've been interested in him for some time and it may be felt that this is the time for him to move on.
"Throughout his career, Kevin has always been a free transfer wherever he's gone and based on his record we think £100,000 is a good offer.
"We thought Kevin did a good job when he was here. If we can get him, then we get him, but if we can't, then we can't."
Reading may face competition from First Division strugglers Stockport County in the race to acquire Watson's services, and they have also been informed of the asking price.
