The 35-year-old Holm, who knocked out Rousey to end her undefeated record in 2015, said in a telephone media conference that Rousey should not fight just to avenge recent losses.
"I think that any fighter should only fight if they want to fight, otherwise they are not going to do well in there anyway," Holm, a former world boxing champion, said.
"If she doesn't have it in her heart to want to keep doing it, I don't think she should (attempt a comeback)," said Holm, adding that "I hope she is not just not fighting because of the two losses."
Rousey, 30, had won 13 straight bouts before she took on fellow American Holm in 2015 for the Ultimate Fighting Championship (UFC) bantamweight title in Australia.
The shock defeat left Rousey so distraught that she said she briefly contemplated suicide.
Rousey, the first American woman to win an Olympic medal in judo, stayed out of the octagon for a year following the defeat.
She attempted a short-lived comeback in December, but was overwhelmed in 48 seconds by current bantamweight champion Amanda Nunes.
Since her titanic upset of Rousey, Holm has also struggled, losing her subsequent three bouts. She previously had an unblemished 10-0 record in MMA.
Holm is looking to turn things around when she headlines Las Vegas-headquartered UFC's return to Asia in Singapore – home base of ONE Championship, the region's leading promoter.
Holm, currently fifth in the UFC rankings, will take on 11th-ranked Brazilian Bethe Correia on June 17 as part of UFC's bid to gain a foothold in Asia, the birthplace of martial arts.
Holm believes the setbacks suffered by her and Rousey reflect a growing level of competition, arising from the MMA's increasing popularity.
"The sport keeps growing, and the girls keep getting better, and they know the competition out there is good. And knowing that, it pushes them, and everyone just keeps evolving and getting better," she said.
"I still know that I am capable of beating all the girls out there. I know I am, but to do so everything else has to be done just right, because the competition is that good."