India also said that it did not see an inevitable conflict of interest between itself and China as far as Nepal is concerned.
"We would certainly encourage all political forces in Nepal, including some new political forces like the Madhesis, to respond positively to the call of Prachanda that they should form a government of national unity," former ambassador to Nepal Shyam Saran said."If our advice is sought, we as a concerned and interested friend, would give that advice," he told the India Tonight programme on CNBC.
He said that the kind of challenges Nepal would be facing could be best dealt with by a national unity government.
Asked about Maoist chief Prachanda's call for abrogation of the India-Nepal Treaty of 1950, Saran said renegotiation of the pact was "not an issue" as it was agreed to with the Nepalese government in 2001.
"We have no reservations if this item is put back on the bilateral agenda," he said noting that one round of talks between foreign secretaries of the two countries had been held after the 2001 proposal.
Saran rubbished reports that the government was surprised by the victory of Maoists. "We did not look for any this or that result," the former foreign secretary said.
Saran termed as "hypothetical" reports about the Nepal King seeking asylum in India and pointed out that the Palace had said King Gyanendra intended to stay in his country. "The Monarchy has given no indication of leaving Nepal," he said.
He said the issue of abolishing the monarchy was a matter best decided by the people of Nepal.
"It is not a matter of loss for India. We will now deal with a government which has popular mandate," he said noting that the interim parliament of Nepal had taken a decision that it would be a republic.
On the message of the Maoist victory in Nepal for Indian Naxalites, Saran said they should emulate the Communist Party of Nepal (Maoist) and join the mainstream. "It should be a very encouraging example," he said.
On foreign policy, Saran said it was for Nepal to decide how it shapes its relations with India or China.