BI-FRN: Is This BI’s Powerful Interest Rate Reform Strategy? Here’s an Explanation!

Rancak Media – , JAKARTA — The deepening of Indonesia’s domestic financial market is set to enter a significant new phase. Bank Indonesia (BI) has announced its plan to issue the BI-FRN (Bank Indonesia Floating Rate Note), a floating rate security, on November 17, 2025. This innovative instrument is strategically designed to cultivate the domestic overnight index swap (OIS) market, a crucial interest rate hedging tool that has remained underdeveloped in Indonesia despite its widespread use as a benchmark in many advanced economies.

Globally, OIS serves as a fundamental reference for a diverse range of financial instruments. For instance, in the United States, the SOFR (Secured Overnight Financing Rate) is a key interest rate benchmark for corporate bonds with an outstanding value of approximately US$165 billion. Singapore leverages SORA (Singapore Overnight Rate Average) as a reference rate for home loan products offered by major banks. Similarly, Thailand’s THOR (Thai Overnight Repurchase Rate) acts as the benchmark for Bank of Thailand’s Floating Rate Notes (FRN) worth 944 million baht, while Japan’s TONA (Tokyo Overnight Average Rate) is the reference for municipal bonds issued by Saitama and Hyogo Prefectures, totaling 244 million yen.

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Agustina Dharmayanti, Head of BI’s Financial Market Development Department, emphasized that the introduction of BI-FRN is integral to the reform of Indonesia’s domestic benchmark interest rates. This initiative marks a strategic shift from a quotation-based system to a more robust, transaction-based framework, aligning perfectly with the objectives outlined in the Money Market Development Blueprint 2030.

Agustina highlighted the significant growth experienced by both the money and foreign exchange markets since the implementation of the Operation Market Rate-Oriented (OMRO) in May 2024. This year, the average daily transaction volume in the money market reached Rp54.4 trillion, while the foreign exchange market saw an impressive US$10 billion. This expansion has been fueled by robust capital inflows through the issuance of SRBI (Bank Indonesia Rupiah Securities) and enhanced pricing efficiency of domestic non-deliverable forward (DNDF) hedging instruments. However, the development of interest rate derivatives, such as OIS, has remained constrained.

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“We aim to further bolster the money market with interest rate hedging instruments like OIS. Currently, its volume is very small, only around Rp60 billion per day. By adding this, we hope to significantly expand money market transactions,” Agustina explained during a media briefing at the BI Office in Jakarta on Friday, November 7, 2025.

Josua Pardede, Chief Economist at PT Bank Permata Tbk (BNLI), believes that the development of the OIS market through BI-FRN will garner strong support from market participants. He views BI-FRN as a crucial catalyst for the reform of domestic benchmark interest rates, strengthening the transition from the Jakarta Interbank Offered Rate (JIBOR) to the Indonesia Overnight Index Average (INDONIA), which is based on actual transactions. Ultimately, a more developed OIS market is expected to facilitate the formation of a truly representative interest rate curve.

Josua further elaborated that BI-FRN is structured as a short-term security featuring a floating coupon tied to Compounded INDONIA. It offers flexible tenors ranging from 1 to 12 months and can be actively traded in the secondary market or used for repo transactions. Notably, non-bank entities can also hold this instrument through a sub-registry, with delivery-versus-payment settlement facilitated by the BI-SSSS/RTGS system and secondary price publication managed by PHEI. “These features mitigate friction in price formation and offer tangible utility for both bank treasuries and non-bank investors,” Josua told Bisnis on Friday, November 7, 2025.

He added that the issuance of BI-FRN will operate in tandem with an OIS matchmaking mechanism. Primary dealers will be mandated to provide two-way quotes with specific bid-ask spread limits and dedicated transaction windows. This combined approach is anticipated to foster a more liquid transaction ecosystem, enhance price discovery, and accelerate the formation of a robust market-based interest rate curve.

Despite these promising developments, Josua cautioned that a significant surge in activity will not occur immediately. Currently, the average daily combined transaction volume for rupiah interest rate swaps (IRS) and OIS stands at approximately Rp100 billion, with OIS accounting for only Rp75 billion—a mere 0.2% of the total money market instruments. “The ecosystem remains shallow, and connections among market participants are limited. This is precisely what the design of BI-FRN and OIS matchmaking aims to address,” Josua affirmed.

Strengthening Interest Rate Transmission

Josua explained that a well-developed OIS market will play a strategic role in bolstering the transmission of BI’s monetary policy. Without a liquid OIS market, the pricing of 1–12 month tenors risks being determined by thin quotations, which could disrupt the efficiency of credit interest rate setting and hedging mechanisms.

Transmission to the Real Sector

With a thriving OIS market, banks and corporations will be able to utilize INDONIA-based benchmarks for floating-rate contracts, credit pricing, and more effective management of interest rate risk. BI’s ultimate reform objective is the establishment of a transaction-based forward-looking term rate. “With a vibrant OIS, banks and corporations gain a more reliable reference for floating-rate contracts, pricing floating-rate credit, and hedging interest rate risk,” Josua emphasized.

Through the ongoing development of OIS, BI aims to significantly increase the proportion of floating-rate assets within the domestic financial market. This shift is expected to make the interest rate structure more responsive and sensitive to changes in monetary policy.

According to Josua, a greater proportion of INDONIA-based assets and liabilities will effectively mitigate interest rate risk for banks and improve their liquidity management. For non-bank investors, BI-FRN offers an attractive alternative for fund placement, providing better protection against price risk when interest rates rise. The expansion of INDONIA-based instruments will also strengthen the signaling of interest rates across different tenors.

“The mechanism is straightforward: when BI adjusts its policy rate, INDONIA, as the overnight rate, moves. Subsequently, the OIS curve adjusts across the 1–12 month tenors. The coupons on BI-FRN and other floating instruments automatically adjust in line with the compounded INDONIA, ensuring that interbank funding costs and floating securities prices respond quickly,” Josua elucidated.

He believes this mechanism will effectively shorten the monetary policy transmission chain to the real sector. Interest rate adjustments for funding and credit can therefore occur much faster than through purely administrative mechanisms.

Furthermore, BI is actively preparing to expand the underlying assets eligible for repo transactions to include high-quality corporate bonds, such as those issued by PT Sarana Multigriya Finansial (SMF). This expansion will come complete with defined haircut rules and cross-infrastructure settlement capabilities. Such a move is expected to significantly strengthen the secondary market and enhance the availability of liquid collateral.

In the long term, Josua is confident that an increasingly deep and liquid financial ecosystem will enable BI’s policy signals to be reflected more swiftly and effectively in banking interest rates and corporate financing decisions.