Towards Transaction-Based Interest Rates, BI Establishes INDONIA and Develops OIS in the Future

Bank Indonesia (Photo: VOI)

Bank Indonesia (BI) officially designated the Indonesia Overnight Index Average (INDONIA) as the reference interest rate for the money market starting January 1, 2026.

Meanwhile, INDONIA is an interest rate index that reflects rupiah borrowing-lending transactions without collateral between banks with overnight tenor that actually occur in the domestic money market.

BI Director of Financial Market Development Arief Rachman hopes that INDONIA can continue to be developed and widely used in the financial market, including for tenors other than overnight.

"Until later in 2030 we will continue to strive to develop this INDONIA and not only overnight tenor, but also other tenors up to 12 months so that this financial market has increasingly credible prices," he told the media, Wednesday, January 7.

According to Arief, because it is based on actual transactions, INDONIA is considered more able to accurately reflect the liquidity conditions and dynamics of the money market.

He emphasized that a reference interest rate must be reliable, transparent, and truly represent market conditions.

"Therefore, it is more to reserve conditions in the market. If we go back to the future, besides that, references must be reliable and can be a reference and transparent. So, those who are more qualified as interest rates that can be a reference," he said.

Previously, JIBOR was available in various tenors, ranging from overnight, one week, one month, three months, to 12 months. However, since January 2, 2019, BI has stopped publishing JIBOR overnight tenors and encouraged the transition of financial contracts to INDONIA as a new reference for that tenor.

Meanwhile, for tenors other than overnight, BI currently uses compounded INDONIA, which is the interest rate calculated from the incorporation of INDONIA values over a certain period, so that the overnight tenor uses INDONIA, while the non-overnight tenor uses compounded INDONIA.

"By using, for various tenors, by using INDONIA Index data. So, for overnight it's called INDONIA, for non-overnight it's now called compounded INDONIA," he said.

Arief also explained that since November 2025, BI has issued financial instruments in the form of BI Floating Rate Notes (BI-FRN) and Matchmaking Overnight Index Swap (OIS).

He added that these two instruments aim to develop the OIS market, which in the future is expected to replace the use of compounded INDONIA.

"The purpose is so that we can develop the Overnight Index Swap market which can replace the compounded INDONIA in the future. By using OIS, of course because OIS is based on transactions, the price becomes more credible and transparent. So, in line with the development direction of the money market at Bank Indonesia, as has been explained in great detail in the BPPU 2030," he said.

He emphasized that the issuance of BI-FRN was carried out in a planned manner as part of efforts to build the OIS market.

According to him, this is because there is no floating interest rate financial market instrument in Indonesia, BI takes an early role through the regulatory sandbox approach, namely by providing instruments so that the market can start trading.

"We introduce transactions. We introduce the goods. Well, please transact," he said.

He added that since November last year, the development of OIS has been running with the availability of OIS tenor of one month and three months and until 2027, BI targets the gradual expansion of the OIS tenor to reach 360 days or 12 months.

Arief emphasized that this development was not done in a hurry so that market participants could transact comfortably and the prices formed really reflect the needs and conditions of the market.

He added that BI plays a role as a facilitator by providing instruments, while the market will encourage its use.

Arief said that by 2028, Indonesia had a benchmark interest rate for up to 12 months that was entirely based on OIS.

"Well, because it's like that, our regulatory reform is complete. We do it gradually, from 2018, long until 2028. We make it gradually, so until 2028," he said.

According to him, thus, the use of compounded INDONIA is no longer necessary because OIS is considered superior because it is based on real transactions and is directly formed by the market mechanism.

"Later, after it has become OIS based on transactions, it is really credible, real, this is using transactions. This is what the market has formed. Later they will use it," he explained.