Modric has not played since November after sustaining the problem while on international duty with Croatia.
It was announced on Thursday that Modric had returned to training with the first team and Ancelotti was satisfied with how his rehabilitation had progressed.
"Modric is improving a lot and it's going very well," he said in a press conference on Saturday. "It can be said that his injury is forgotten.
"He will be ready for El Clasico [next month]."
Ancelotti also lavished praise on defender Pepe, recently returned from a rib injury, before providing updates on Sergio Ramos and Fabio Coentrao.
"Pepe's return is great," he said. "He has safety, confidence and personality. He helps the young people who also play as centre-back.
"Ramos' recovery is going very well. Coentrao will train with the team again next week."
Real visit Elche in La Liga on Sunday and Ancelotti is expecting a tough encounter despite their hosts' lowly position in the table, one place above the relegation zone.
"There is pressure because tomorrow will be a difficult game," he said. "Our goal is to win and to stay leader in La Liga.
"Elche has improved a lot the last 15 days, it will be a match with a lot of intensity and rhythm.
"I don't know if I will rotate tomorrow. I think it will be more or less the same as it was against Schalke."
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