According to the global financial services major, Indian equities are benefiting from the start of a new growth cycle, a benign global environment resulting in a positive shift in terms of trade and reforms, which can lift India's potential growth rate.

"Our December 2015 BSE Sensex target is 32,500," Morgan Stanley said in a research note and added it is overweight on sectors like energy, consumer discretionary, financials and technology.

Stock markets have seen significant gains in 2014 and the Sensex has gained 7,268.23 points, or 34.33 per cent, so far this year.

"Sentiment is strong with support from flows and momentum our market timing indicator suggests that market mood is buoyant though yet to hit exuberant territory," it said.

The 30-share Sensex was trading 0.41 per cent down at 28,441.16 in the afternoon after the Reserve Bank kept the key interest rates unchanged today.

"Our view is the government's reforms are on track and if these reforms progress well, we see upside risk to earnings estimates," Morgan Stanley said.

Some key initiatives that have been taken by the Centre include: efforts to make India a better place to do business, tax reforms to kick start growth, fiscal consolidation to stem inflation, realignment of subsidies to make the economy more productive and boost to infra spend to lift growth.

While foreign flows have been strong in the past 12 months, in the coming 12-24 months Indian markets could see sharp rise in domestic flows into equities as explained earlier, the report said.

The report further said equities for now look less appealing against long bonds but the likely rate cuts in future could change that and could feed into equity valuations.

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