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If oil prices rise by another $20 in a sharp and sustained manner, it will raise macro stability risks in Asia and the economies which are most exposed are India, South Korea, and Thailand, Morgan Stanley said in a report.

India is exposed on both inflation and current account fronts, Thailand is exposed via its current account but relatively less so on inflation, and in contrast, South Korea is exposed on inflation but not current account deficit.

"A US$10/bbl rise in oil prices would have a drag of 20bps on Asia"s current account balances, we estimate, with Thailand, Korea and India most exposed, given their high dependence on oil imports," Morgan Stanley said.

The Indian government could consider a reduction in fuel excise duty cut (Rs 5-10/lt) but any additional explicit stimulus would be less likely in order to balance concerns on fiscal slippage, the report said.

The RBI may have to act sooner than expected ie. possibly in the April policy review to preserve macro stability and increase the risk of it taking up front loaded rate increases, Morgan Stanley said.

It said that a US$10/bbl increase in oil prices is unlikely to trigger any major divergence from the current gradual normalisation path.

"The exception would likely be India, where inflation is already tracking above RBI's comfort zone and the resultant currency volatility could bring forward our expectations of a June rate hike to April instead," it added.

"The risks towards a more hawkish monetary policy outlook arise in EM Asia if we were to see significant depreciation in currencies,as central banks would then have to hike policy rates to stabilise the financial markets and manage macro stability.

"Geopolitical tensions, in a nutshell, will impart a stagflationary impulse in Asia. To be sure, the current volatility in financial markets and rise in oil prices appear to be manageable for Asia. Asia's oil burden is rising from low levels and macro stability indicators (inflation and current account) are benign and staying in policy makers' comfort zones. This has allowed Asia to be able to absorb the impact so far.

"However, risks would arise if oil prices rise further due to geopolitical tensions in a sharp and sustained manner. In that context, we think that policy makers will be more focused on the growth downside risk (and aim to look through the inflation upside risks) and would employ fiscal policy first to address these concerns," it added.

The most direct impact will be via higher oil and commodity prices. This is especially so for Asia as it is highly dependent on oil imports to meet its energy needs as compared to the US and Europe. "We have been of the view that much of the oil price increase since the low of US$19/bbl in Apr-20 is driven by endogenous factors, i.e. stronger global demand and hence the impact has been manageable."

If oil prices rise further in a sharp and sustained manner, it would be a clear negative for Asia. One mitigating factor would be that Asia's oil burden (oil consumption as percentage of GDP) is rising from levels that are way below trend, providing a buffer for the region to absorb higher oil prices, it said.

Volatility in global financial markets will have spillover effects and tighten financial conditions in Asia,especially via currency depreciation for EM Asia economies. While Asia economies in general are less dependent on capital markets for funding needs compared with DM economies such as the US, this will nonetheless still be a drag. A period of sustained geopolitical tensions and volatility in financial markets could adversely affect corporate confidence, leading corporates to hold back on capex and hiring decisions, weighing on growth, Morgan Stanley said.

Asia is the world's largest exporter. Hence, if geopolitical tensions weigh on global consumption and investment, this would in turn lead to weaker external demand conditions for Asia. In particular,as capital goods exports account for over 40 per cent of the region's total exports, Asia would be especially exposed to any headwinds to the global capex cycle.