Why the party isn't over yet for India stocks

Traders work on the trading floor of the Motilal Oswal Financial Services Ltd. office in Mumbai, India.
Vivek Prakash | Bloomberg | Getty Images
Traders work on the trading floor of the Motilal Oswal Financial Services Ltd. office in Mumbai, India.

Record levels in India's stock markets amid continued post-election euphoria have raised concerns over whether a correction is due, but analysts say the bulls' rein will continue for some time.

A raft of measures to revive Asia's third-largest economy unveiled at the government's budget last week are set to provide fresh impetus for the market, say strategists.

"The new government made a positive statement of intent. This should keep sentiment in the equity market buoyant," said Jitendra Sriram, equity strategist and head of research, India at HSBC.

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The budget, which had a strong focus on fiscal consolidation and improving the investment environment, was the first major policy statement by the new government led by Prime Minister Narendra Modi. It was highly anticipated by investors looking for clarity on its longer-term vision for the economy.

Following the budget, Morgan Stanley raised its June 2015 target for the benchmark Sensex index by 9 percent to 28,800 - 10 percent above current levels of 25,962.

Indian stocks have rallied 20 percent year to date, making them the best performing Asian market this year.

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"The investment push in the budget both directly via government spending as well as tax cuts, together with higher FDI (foreign direct investment) limits in insurance and defense should augur well for the progression of the share of profits in GDP (gross domestic product), which is at multi-year low," Morgan Stanley wrote in a report, referring to the government's decision to raise the FDI cap for insurance and defense to 49 percent from 26 percent.

Other measures aimed at boosting investment include raising the income tax exemption limit to 250,000 rupees from 200,000 rupees and raising the limit exempting bank loans for the infrastructure sector from reserve requirements. This is intended to reduce the cost of funding for infrastructure companies and boost capital expenditure.

Nomura remains positive on the market, noting that the budget strengthens its case for being bullish on infrastructure and financial plays.

"The government has made a serious attempt to re-energize the investment cycle by extending tax concession to the infrastructure sector. A major push has also been made into urban infrastructure and development of new cities," said Nomura strategists led by Prabhat Awasthi.

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The government committed itself to extending central funds to improve urban infrastructure in 500 cities and towns, providing safe drinking water, sewerage,solid waste management and digital connectivity.

The bank maintains its year-end target Sensex target of 27,200, adding that recent market weakness pushed the market in attractive territory.