Chinese Yuan as Reference Currency: India and sanctions-hit Russia are said to be considering the use of the Chinese Yuan as the reference currency to facilitate oil trade between the two countries.

Key Details:

• India is the world’s third-largest oil importer so it is considering buying oil from Russia at a discounted rate to cool inflationary pressures.
• According to some sources, the plan would enable direct convertibility between the rupee and Yuan and will help cut transaction and hedging costs.
• The proposal would allow Indian exports of oilseeds, sugar to China and pharmaceuticals to be settled in rupee, while keeping out trade in high volume products such as electronics.
• As the India and China's currencies are not directly convertible, most trade between them is handled in US dollars.
• So, by allowing Indian importers to pay for Chinese goods in yuan would allow the South Asian nation to conserve dollars to cover rising oil import expenses in the face of rising crude prices and the rupee’s slump to a record low.

Why is Russia trying to sell oil to India?

• Russia is trying to sell oil to India because of economic sanctions imposed by the West against Russia after the Russian military invaded Ukraine late last month.
• Since the United States and Europe implemented sanctions last month, Russia has been attempting to sell oil to India at a big discount.
• Certain Russian banks were withdrawn from the SWIFT payments system as part of Western sanctions, limiting Russia's capacity to deal with the rest of the world.

Reasons for using Chinese Yuan instead of the U.S. dollar for oil trade:

• The reasons for using Chinese Yuan instead of the U.S. dollar for oil trade are as follows:
• For decades, major oil producers have sold their output to international purchasers in exchange for US dollars.
• Oil sellers have been willing to accept U.S. dollars for their oil because the currency is widely accepted in the global market for goods and services.
• Since global trade in dollars is cleared by US banks, the US government has the authority to freeze currencies belonging to its opponents which then debilitates economies.
• To avoid this risk, many countries have been exploring for alternatives to the US dollar as a means of conducting international trade.
• China has recently emerged as a big economic power, which has boosted the yuan's perceived worth and made it a more acceptable currency for international trade.
• However, it should be noted that the Chinese Yuan facilitates just around 3% of world trade, with about 90% of global trade still taking place in US dollars.