The Sterling Overnight Index Average (SONIA) is the benchmark overnight interest rate for unsecured Sterling lending — the rate at which banks lend to each other in the UK overnight money market on an unsecured basis. Administered by the Bank of England, SONIA is calculated daily as the trimmed mean of overnight Sterling transactions above a threshold size, based on actual market transactions rather than bank estimates. SONIA replaced LIBOR (London Interbank Offered Rate) as the primary risk-free reference rate for Sterling-denominated financial contracts following the global transition away from LIBOR, which was discontinued at end of 2021 due to manipulation scandals. SONIA is now widely used as the floating rate reference in Sterling interest rate swaps, bonds, loans, and derivatives — with SONIA-linked loans and floating rate notes replacing LIBOR-linked instruments in the UK market. For Indian financial market participants, SONIA is relevant because: Indian corporates raising external commercial borrowings (ECBs) or issuing Sterling bonds reference SONIA as the floating rate component; Indian IT and pharmaceutical companies with substantial UK revenues may enter SONIA-linked hedging instruments to manage their Sterling interest rate exposure; and Indian banks participating in Sterling interbank markets or providing trade finance facilities to UK counterparties need to track SONIA as the prevailing cost of Sterling funding in international markets.
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