India has previously been wary of President Hamid Karzai's policy of talking to the insurgents as it fears that Afghanistan could come under control of a Taliban-influenced government.
"Afghanistan has embarked upon a process of national reconciliation. We wish you well in this enterprise," said Singh, who was given the rare opportunity for a foreign leader to address parliament.
He said that Afghan MPs should make decisions about the country's future "without outside interference".
"India will respect the choices you make," he said. "Our only interest is to see a stable, peaceful and independent Afghanistan living in peace with its neighbours."
India has been a major donor to Afghanistan since the fall of the Taliban in 2001, and Singh announced on Thursday a fresh package worth $500 million for new roads, social programmes and health facilities.
Such support meant that Singh was warmly received during his two-day visit to Kabul, but any sign of improving links between India and Afghanistan raises hackles in Pakistan.
"India's biggest objective is to have a friendly Afghanistan and it does not want to leave it in Pakistan's hands only," Pakistani analyst Rahimullah Yusufzai told AFP.
The US-led coalition in Afghanistan has also backed Karzai's plan to reach out to the Taliban, who once sheltered al Qaeda chief Osama bin Laden, but it has insisted fighters first lay down their weapons.
After the killing of Bin Laden in Pakistan on May 2, US Secretary of State Hillary Clinton called on the Taliban and other rebel groups in Afghanistan to abandon links to Al-Qaeda and join a peaceful political process.
The United States plans to start reducing troop numbers in Afghanistan from July, with all foreign soldiers due out by the end of 2014.
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