Watson, 31, has featured twice for club Edinburgh since suffering the head knock in November's loss to New Zealand.
The back-rower, who captained his country in July's series defeat to Argentina, replaces Luke Crosbie in the starting lineup for Sunday's game in Paris with the visitors unbeaten in their opening two games of the Championship.
"We think Hamish is back to full fitness, he's played with real speed in his two games back for Edinburgh," Townsend said.
"We obviously know what Hamish has done for us in the past and in recent games too.
"He's got this opportunity which we know he'll go and grab with two hands," Townsend added.
Townsend made two other changes from the squad that beat Wales two weeks ago with centre Chris Harris dropping out for back-rower Sam Skinner and scrum-half Ali Price in for George Horne, on the bench
The former Scotland fly-half, who has also led his side to a win over England during this year's Six Nations has picked an additional forward among his replacement instead of a third back, as France have done nine times in their past 12 Tests.
"It's not something we tend to go to very often," Townsend said.
"So there's a little bit of matching up what they might to do off their bench, bringing more forwards on.
"We've got really good competition in the forward pack, second rows, so we know they'll help us improve and we've got players who can play in multiple positions," he added.
Glasgow Warriors' Price, 29, made the most recent of his 61 international appearances in November's victory over Argentina.
"He's been excellent in training," Townsend said.
"It was disappointing for him to go from a starter in all our games in November to not making the 23.
"We felt at the weekend when he went back to play for Glasgow he made a big impact off the bench," he added.
Full-back Stuart Hogg keeps his place to make his 99th Test appearance despite suffering a head injury of his own in the first half of February 11th's record victory over Wales.
Champions France welcome Townsend's men after beating Italy and losing to Ireland, ranked number one in the world, in their opening two fixtures.
Team (1-15): Stuart Hogg; Kyle Steyn, Huw Jones, Sione Tuipulotu, Duhan van der Merwe; Finn Russell, Ben White; Matt Fagerson, Hamish Watson, Jamie Ritchie (capt); Grant Gilchrist, Richie Gray; Zander Fagerson, George Turner, Pierre Schoeman
Replacements: Fraser Brown, Jamie Bhatti, WP Nel, Jonny Gray, Sam Skinner, Jack Dempsey, Ali Price, Blair Kinghorn
Coach: Gregor Townsend (SCO)
