The market is currently trading at a price-to-earnings ratio of 16.3, above the valuation of China's Shanghai Composite at 14, but below the valuation of Japan's Nikkei 225 at 19.5.
"Everything has to move in the right direction to justify these valuations," he said.
While India's economy appears to have turned a corner, the country's upturn is still at a nascent stage, with analysts believing further structural reforms required to unlock its full potential.
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Investors will be closely watching the upcoming budget on February 28 to gauge the government's reform resolve.
As such, Faber, who has been investing in Indian stocks over the past two years, says he's not inclined to add to positions right now.
"The market could finish the year somewhat higher… it all depends also on foreign investment flows and on foreign economies," he said.
The most attractive stock investment
But Faber is more optimistic on gold stocks despite bullion's volatile start to the year.
"Gold shares are the most attractive asset class within the equity market – they have been hammered over the last three years and are showing signs of bottoming out," he said.
Faber's call is based on his bullish outlook for the precious metal this year, which he expects will trend higher as confidence in the ability of central banks to solve global economic woes dwindles.
"When confidence in central banks finally collapses, then gold has a 30 percent upside potential, easily, this year," he said in an interview with CNBC in January.
He recommends gaining exposure to gold miners through exchange traded funds such as The Market Vectors Gold Miners ETF (GDX), the Junior Gold Miners ETF (GDXJ) and Sprott Gold Miners ETF (SGDM).
Faber, however, cautions that the trade is not for the faint of heart.
"If someone is more risk inclined, he will do better in gold miners [than physical gold]," Faber said in an interview with Washington DC based TV channel RT America last week.
"There's a higher risk [in the miners], it's more volatile. Gold prices drop $200, the miners are going to get slammed. Gold goes up by $100, [the miners] go up by a higher percentage," he said.