First, the brokerage arm of Morgan Stanley has been bullish on India for quite some time, and cynics have been wondering whether the optimism had more to do with offloading their own holdings of Indian securities rather than any great prospects for local companies.

If the country's weightage in the MSCI index increases, that would result in buying Indian stocks, as international fund managers benchmark themselves against that index. No such benchmarking occurs with the views of Morgan Stanley's brokerage arm.

Yet, even if the MSCI weightage increases, that may not be significant, because total flow of funds to emerging markets has declined, and all that India will have is a bigger share of a smaller pie.

It is now quite clear that even good news fails to drive the market upwards--companies such as Reliance, Novartis, and ACC have delivered better than expected results, but theirscrips have moved down.

Even the news of share buybacks being allowed has had little effect, and scrips of companies which have every chance of buying back their shares have continued to languish. The government is now reportedly thinking of tax sops for mutual funds, in an effort to get the small investor back into the market.

But while a tax sop may help UTI retain its investors, such quick fixes will not address the basic problem, which is pessimism about the state of the economy. The market has already expressed its view of the prime minister's talk of a Rs 28,000 crore highway. Until the government is able to get its economic act together, measures aimed at the capital markets alone will not lead to a sustainable rally.