Indigo Dye is crafted from Indigo Flowers. It can be used to dye Wool and in crafting insulated RedPower 2 wires. Indigo Flowers are commonly found in forest and plains biomes and can also be grown by using Bone Meal on grass.
Indigo Dye has the same color as Lapis Lazuli, however, it does not replace it in every recipe. The reason of this dye being implemented is because Lapis Lazuli is used in several important crafting recipes, rather than just being used for dyes, whereas Indigo Dye isn't.