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What India's budget means for its raging stock rally

Indranil Mukerjee | AFP | Getty Images

While there were no "fireworks" in India's highly-anticipated budget, investors approved of the government's various pro-growth initiatives – which ranged from boosting infrastructure investment to lowering corporate taxes – adding fuel to the country's stock market rally.

Finance Minister Arun Jaitley presented the budget on Saturday against the backdrop of sky-high expectations, with some describing it as the most important economic event for India's stock market this year.

The budget's overarching theme was ramping up growth, which Jaitley predicted would accelerate to 8-8.5 percent in the fiscal year starting in April, from 7.4 percent this year.

Read MoreNo big bang, but Indian budget goes for growth, investment

Many banks reiterated their bullish views on India's equity market following the budget.

Nomura, among the most upbeat, expects the benchmark Sensex to rise to 33,500 by year-end – 19 percent higher than current levels, while Citi predicts the index will end the year at 33,000. Goldman Sachs, meanwhile, forecasts the Nifty index will rise to 9,500 - a 6 percent rise from current levels.

The Sensex and Nifty have risen 7 percent and 8 percent, respectively, so far this year, after double-digit gains in 2014.

India's biggest challenges

"Overall, from the markets perspective, we view today's budget as positive as it continues to adhere to the government's agenda of higher growth and its firm emphasis on easing longer-term supply-side constraints," said Nomura.

"On the other hand, a path to lower corporate tax rates improves the longer-term visibility of corporate earnings," the bank said.

Key announcements

Perceived as business-friendly, the budget's key features include a reduction in the corporate tax rate to 25 percent from 30 percent over four years starting April 2016, as well as a major increase in public spending on infrastructure. The government plans to spend an additional 700 billion rupees ($11.3 billion) for upgrading the country's roads and railway in the fiscal year 2015/16.

The increase in public investment, however, has come at the cost of delaying deficit reduction plans. The government pushed back its target to reduce its fiscal deficit to 3 percent of gross domestic product (GDP) by a year to 2018.

Other reforms that garnered investors' attention were fresh laws to tackle black money and a new bankruptcy code to make it easier for investors to exit unviable ventures. A key priority for the government is improving the ease of doing business in India.

Goldman bullish on India

Goldman Sachs strategists led by Sunil Koul agreed the case for Indian equities remains positive.

"The reform momentum remains positive with the Union budget focusing on growth, reviving investments and outlining various structural reforms that should bode positively for most sectors. We also expect the rate cycle to ease further," Koul said.

"Our sector analysts see the budget as positive for most sectors, particularly infrastructure due to the increased capital spending, financials due to the establishment of bank board bureaus to select bank heads, and a new bankruptcy law. We expect the reforms to continue gathering pace and help boost economic growth and corporate profitability," he added.

The bank tips the market will remain rangebound in the near-term but expects earnings to drive shares higher by year-end.

If there's one concern Goldman has around investing in Indian equities, it's valuations. Valuations for MSCI India have reflated to 18 times forward price-to-earnings compared with 16 at the start of the year.

However the bank says it takes comfort from signs of a cyclical pick up in the economy, potential for further rate cuts and continued progress on reforms.