Network-based approaches are becoming increasingly popular for drug discovery as they provide a systems-level overview of the mechanisms underlying disease pathophysiology. They have demonstrated significant early promise over other methods of biological data representation, such as in target discovery, side effect prediction and drug repurposing. In parallel, an explosion of -omics data for the deep characterization of biological systems routinely uncovers molecular signatures of disease for similar applications. Here, we present RPath, a novel algorithm that prioritizes drugs for a given disease by reasoning over causal paths in a knowledge graph (KG), guided by both drug-perturbed as well as disease-specific transcriptomic signatures. First, our approach identifies the causal paths that connect a drug to a particular disease. Next, it reasons over these paths to identify those that correlate with the transcriptional signatures observed in a drug-perturbation experiment, and anti-correlate to signatures observed in the disease of interest. The paths which match this signature profile are then proposed to represent the mechanism of action of the drug. We demonstrate how RPath consistently prioritizes clinically investigated drug-disease pairs on multiple datasets and KGs, achieving better performance over other similar methodologies. Furthermore, we present two case studies showing how one can deconvolute the predictions made by RPath as well as predict novel targets.