Sharif has invited Modi for a visit to his country.
"We welcome increased engagement between India and Pakistan, and their leaders and ... India's engagement with its neighbours, leading up to the inauguration," Psaki told reporters at a daily news briefing.
"We believe increased engagement between India and Pakistan is a positive step, so we'll see what happens," she added.
Psaki said the US would not attend Modi's inauguration.
"We don't have any plans to send our representatives from the United States," she said. "It's standard for events and inaugurations in India, so it should come as no surprise."
US had denied Modi, as chief minister of Gujarat, a visa in 2005 following allegations about his role in the 2002 riots in the state in which over 1, 000 people, were killed. Several probes by different investigative agencies in India could not establish his involvement in the killings in any fashion.