"At the moment ... there's an understanding between me and (Indian) Prime Minister Manmohan Singh, and there is a desire, the governments are interacting well," Musharraf told The Associated Press in an interview in Canberra.
But, he warned, "the same kind of relationships, harmonious relationships, cannot be guaranteed between future leaders of Pakistan and India."
The nuclear-armed neighbors have gone to war twice over the disputed Himalayan province they have shared since 1947. Both countries claim they should control the province in its entirety.
While relations between the two countries are currently good, there remain plenty of stumbling blocks before a comprehensive Kashmir settlement can be reached.
Speaking to The AP on the first full day of a visit to Australia during which he will sign a counterterror pact with Prime Minister John Howard, Musharraf said that a failure by Islamabad and Delhi to agree on disputes over water provision in Kashmir is a strain on the quest for a wider agreement.
"They are bad irritants, I would say," Musharraf said of disputes over a dam being built by India in its part of Kashmir. "For it shows that if we cannot resolve these smaller issues it puts into doubt our capability of resolving the very complex major dispute which has been there since 1947."
'Baglihar work to be suspended'
Political leaders also will need "courage and boldness" to face down opponents on both sides who will try to derail the process with terror acts like Monday's bombing that tore through a crowded market in India's portion of Kashmir killing 15 people and wounding 60.
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He said both sides "have to be bold enough" to oppose and stand up against all such acts.
In the Indian part of Kashmir, a prominent separatist said Tuesday he suspected Indian government agencies of plotting Monday's attack to derail peace efforts.
Hurriyat leaders send confusing signals
"It seems to be part of a conspiracy, aimed at sabotaging the ongoing freedom movement," said Syed Ali Shah Geelani, head of the hardline pro-Pakistan faction of Kashmir's main separatist alliance.
Pakistan says the Baglihar dam on the Chenab River would deprive its main agricultural province, Punjab, of water for irrigation and violates the 1960 Indus Water Treaty, which regulates the sharing of river water between the two rival nations.