It's quite fine to put more water at the start in Indian dishes to make the sauce thinner. Normally there's no need to adjust the spices when you do this, but you'll have to adjust the salt to taste(only at at the end) to avoid the watery taste. Avoid adding water at the end, that's how the taste gets watery.

You said it seemed milky? That's probably yogurt. You can add that instead/beside water, and that can be added either at the beginning or in the last 10-15 min to adjust the texture of the sauce (to thin it as yogurt loses all its thickness when heated), and unlike water yogurt affects the hotness of the peppers, so it's a good trick to correct a dish you realize near the end will be too spicy.