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What do South Korea and India have in common?

The answer is a reliance on oil, which hit nine-month highs last week on turmoil in Iraq, raising concern about the impact on Asia's economies.

The geopolitical risks from an escalating crisis in Iraq are hard to predict, but the impact on currency markets from the rise in oil is clear, analysts at Mizuho Corporate Bank said in a research note.

Read MoreHow the collapse of Iraq could actually save oil

"Unsurprisingly, currencies of the largest oil importers, such as India and Korea (the third and fourth largest global crude importers respectively) have taken a significant initial hit," they added.

The Indian rupee last week hit its lowest level against the U.S. dollar since late April, while the South Korean won was pushed off a six-year high around 1,015 per dollar.

Asia is heavily dependent on oil imports and according to the U.S. Energy Information Administration, seven of the world's top 15 net oil importers are from the region. China, Japan, India and South Korea are all in the top five, with the U.S. leading the list.

Brent crude oil prices have risen more than 5 percent over the past two weeks and were holding near $115 a barrel on Friday.

Mizuho Corporate Bank said India was the most vulnerable Asian economy to higher oil prices given that the Indian rupee has depreciated over 30 percent since the start of 2008. It is followed by the Philippines, Korea, Thailand and Indonesia, Mizuho said.

"What's more, fuel subsidies in India, Indonesia and Thailand mean vulnerabilities to oil price shocks are in reality even more pronounced," Mizuho analysts said.


An employee of a petrol pump prints the receipt for a customer in New Delhi.
Prakash Singh | AFP | Getty Images
An employee of a petrol pump prints the receipt for a customer in New Delhi.

India's double whammy

For India, the rise in oil prices is bad timing. Wholesale price inflation in Asia's third largest economy is at a five-month high and forecasts for weak monsoon rains that irrigate most of India's food production have fueled the inflation concerns.

Read MoreInflation may be rearing its ugly head again in India

"Given its importance for India, it is worth keeping a close eye on oil," Frederic Neumann, the co-head of Asian economic research at HSBC said in a note last week.

In addition to fueling inflation, there are two other risks Neumann says oil prices pose to India's stuttering economy.

"Higher oil prices could prove costly at a time when markets expect further belt-tightening. Energy is only partially liberalized, with the government picking up the tab for any discrepancy between international and domestic prices," he said.

Read MoreAre emerging markets giving off bad vibes?

A rise in oil prices could also put pressure on India's trade deficit, which stood at $11.23 billion in May.

"We estimate that a sustained $10 per barrel rise in the global cost of oil could add up to 0.5 percent of GDP (gross domestic product) to the current account deficit. Manageable, but not something to ignore," said Neumann.

Silver lining

Analysts said that unless there is a significant escalation in the conflict in Iraq, oil prices should come off the boil – and for now that's the main scenario.

Talking about the impact of oil on Asian economies, Sammy Simnegar, a portfolio manager at Fidelity Investments in Boston, told CNBC: "At the end of the day, it comes down to which countries can manage their macro finances the best."

"India, because of the election of [Prime Minister Narendra] Modi, and Indonesia, because it has addressed some of its structural issues, are better positioned than some other places such as Turkey."

India and Indonesia were two countries hit hardest in Asia when fears about an unwinding of U.S. monetary stimulus led to an exodus from emerging markets last year.

Measures to address wide current-account deficits and ease investor fears have helped these markets recover ground this year.

Contact World Economy

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