What choices do you have on a bus?
No one in their right mind is going to challenge 2 happy drunks that are about to get off the bus, just for admiring a baby. The safest option seemed to have been to ignore/smile and wait for them to get off. And that's what op did. No harm done.
If they had been aggressive, challenging, threatening etc, a different reaction would have been needed. But it wasn't.
I doubt this will be the last time this kind of thing happens.
About 3 weeks ago a very manic lady took a complete shine to my dd and kept following her round tesco trying to stroke her hair. Dd was terrified, but is 11 so didn't really show it. I could tell, but the lady couldn't (for various reasons). Anyway, I had a nice chat with the lady (about dd's hair) and when I had managed to get her to let go of dd's plaits I put my arms around dd, wished the lady a very nice day and legged it.
The lady didnt mean any harm but the whole thing shook dd up. We abandoned the shopping and went for coffee and cake and a big fat discussion about mental illness, tolerance and private space.
To bolster the discussion, I told her about the day a homeless person had given me a 20p coin 'to buy her sweets' when she was a baby. She was a beautiful baby with big brown inquisitive eyes and for some reason resonated with this old guy. He clearly needed the money himself, but was insistent.
Often the best approach is to engage or be passive, not always challenge. Op, I think you handled it exactly the way you should have.