Malaysia has an average inflation of 3.5%, that's about double US's rate.
The common wisdom here is to grow the stash 7% , 3% goes to inflation and 4% goes to SWR. How does that affect my calculation wrt SWR.
I hope that's not common wisdom, because it's wrong. The 4% SWR has nothing to do with a 7% return nor 3% inflation. It was derived through backtesting past scenarios that included periods that had double digit inflation and/or low single digit or even negative returns. The long term stock market average return in the US is 7%
after inflation, so if you're subtracting inflation from that, you're double counting it. It is definitely not a simple subtraction calculation from long term averages.
That said, your question is an interesting one, and one that will affect me personally as well, as I plan to retire outside of the US. Obviously you wouldn't want to invest 100% of your portfolio in companies based only in a small country/economy, even if you live there. The risks of a lack of diversification would be way larger than the risks of somewhat higher inflation, so I think we can all agree that international diversification is best.
Part of the solution is that when you invest in other parts of the world, your returns correspond to the currency in which you're invested. So if you buy US stocks, you receive a return in US Dollars (USD). Inflation in Malaysia would affect the Ringgit, but it would not affect the USD. So when your returns are calculated, or when you sell to fund your retirement, your USD returns end up buying more Ringgit because they were not inflated (as much). Similar to investments from the Euro Zone, Great Britain, China, etc. if they also experienced lower inflation.
I've personally noticed this when investing in international stock funds over the last few years. The returns seem low, but that's partially because the USD is has been strong so when the international returns are converted back to USD, they are smaller due to the exchange rate. However, if the USD were to experience higher inflation, the opposite would occur. Similar with if the USD loses value to the Euro, Yen, Yuan, etc., which it will eventually because currency exchange rates are somewhat cyclical.
So basically, most of your returns should still outpace inflation, because with a global porfolio, your returns will reflect the currency they're invested in. Of course, this will vary somewhat based on your actual holdings and asset allocation. It would not be a terrible idea to plan for a slightly lower withdrawal rate to help offset some of these concerns.