Market crashes, rebounds: Will Iran–US–Israel tensions keep volatility high?

Sensex and Nifty are rebounding today after a war-driven sell-off, but the moves are still being dictated by the same headlines on Iran–US–Israel tensions, oil and the rupee that triggered the recent crash. Now the question is that will this volatility sustain for a longer time or fade away?

1. Why the market is rising today (5 March 2026)

After two brutal sessions, the market is seeing a classic relief rally.

• Global mood improved: Asian markets and Wall Street rebounded, so India is tracking a broader risk on move rather than generating independent bullish news.​
• Oversold + short covering: Nifty dropped to a six-month low and India VIX spiked, creating oversold conditions till 4^th March 2026. However, on 5^th March 2026 market uptick is being powered by short covering and bargain hunting in quality large caps, not because the war has ended.
• War fears slightly less extreme: Headlines around possible diplomatic backchannels and oil tankers movement safely through the Hormuz, have marginally reduced the ‘worst-case’ sentiment.
• Heavyweights leading: Index gains are coming from names like Reliance, L&T, Sun Pharma, BEL, Adani Ports, NTPC and cyclicals, which were beaten down in the previous slide and now provide maximum index impact on any bounce.

In short, today’s rise is a ‘breather’ after panic, supported by better global cues and positioning, not a signal that risks have vanished.

2. What is going on in the market now

Right now, the market is in an event driven, headline sensitive phase, swings are being dictated by war updates, oil ticks and the rupee, with domestic fundamentals playing a supporting, not leading, role.

• Volatility regime shift: India VIX jumping into the low‑20s tells you that traders are pricing in wider daily ranges and more uncertainty over the very short term.
• Sharp intraday reversals: Gap downs on war or oil headlines followed by intraday recoveries on global relief are typical of this regime & today’s bounce fits that pattern.
• Sector rotation:
  • Under pressure: aviation, paints, tyres, OMCs, chemicals and rate sensitives that hate higher crude and weaker rupee.
  • Relatively strong: defence, upstream oil (ONGC, Oil India) and gold linked themes, which benefit from war or commodity spikes.
• Macro backdrop still underneath: Despite the shock, stakeholders keep flagging that India’s domestic macro starting point, moderating inflation, steady consumption and ongoing capex, remains reasonably supportive over a 1–2 year view.​​

So, price action looks noisy, but it’s anchored around a few clear levers: war, oil, rupee, FIIs and volatility.

3. Why this volatility is likely to die down

Past episodes and current indicators, such as India VIX and flow data, suggest this bout of event-driven volatility is more likely to fade over time than remain at today’s extreme levels. Recent history shows that such volatility spikes have been temporary: during Covid19, Nifty fell about 40% from around 12,400 in January 2020 to 7,511 in March 2020, but it reclaimed its pre-event-driven within 10 months and has since more than tripled from those lows. 

Even around the Russia Ukraine war in February 2022, Nifty briefly slipped toward 17,000 and India VIX jumped to about 37, but the index later went on to make new highs once the initial shock was absorbed and investors recalibrated for higher oil and geopolitical risk.

a) Volatility spikes are usually episodic

• India VIX just had its sharpest two day jump since early Covid levels, driven by a one-off geopolitical shock, not by a domestic financial-system crisis.
• Historically, such spikes tend to fade once:
  • the initial shock is understood,
  • the worst case is priced in, or
  • a new range in oil and the rupee is accepted as ‘the new normal’.​​

Indicators to watch: VIX stabilising or drifting lower from current highs, and smaller intraday gaps even if the index is not yet making new highs.

b) Markets adapt to higher oil and war headlines

• Stakeholders already note that the ‘major risk’ is the energy shock from crude, not a collapse in domestic demand or banks. That is painful but something corporates and policymakers adjust to via pricing, hedging and policy response over time.​
• Once the market builds new earnings assumptions for oil sensitives and the rupee, day-to-day moves tend to calm, even if indices remain below previous peaks.​​

Indicators to watch stabilisation of Brent in a band rather than new spikes every day, and corporate commentary shifting from ‘shock’ to ‘management of impact’ in upcoming interactions.

c) Positioning is already cleaner after the flush-out

• The recent crash has knocked out a lot of leverage and momentum longs, particularly in high beta midcaps/small caps and crowded themes, which typically reduces the ‘fuel’ for further forced selling.
• Reports already mention ‘dip buyers stepping in’ and value buying in heavyweights like HDFC Bank, Reliance and others when indices correct sharply, implying that there is still domestic capital willing to absorb panic days.

Indicators to watch: Lower delivery-based selling on down days, and DIIs continuing to buy even as FIIs are cautious.

d) Macro and policy anchors in the background

• Even in their war-focused notes, brokerages keep highlighting India’s macro positives: moderating core inflation pre-oil shock, decent consumption trends, war-focused continuity supporting capex and manufacturing.​​
• That doesn’t stop near-term volatility, but it provides a medium-term anchor that tends to draw volatility lower once the external shock stabilises.​​

Indicators to watch: Upcoming inflation prints, RBI communication, and whether growth forecasts are trimmed modestly or aggressively after the oil move.

Markets are up today on relief and short‑covering after falling earlier on the back of war‑driven fears, an oil and rupee shock, and heavy FII selling. Current volatility spike is driven by an extraordinary but finite geopolitical event. Historical VIX behaviour and macro anchors all suggest it should cool once crude, currency and conflict move from ‘unknown shock’ to ‘known risk’.