Interferometric Imaging Radar Altimeter（InIRA） is a new radar altimeter system， which combines synthetic aperture and interferometric measurement technologies. It can achieve two-dimensional imaging of observation areas and wide-swath height measurement by adopting small incidence angles with short baseline. Because the interferometric imaging radar altimeter works all time in orbit， the amount of raw data is so huge that it cannot be all downlinked. Block Adaptive Quantization （BAQ） algorithm is a commonly used data compression method for spaceborne Synthetic Aperture Radar （SAR）， but it cannot be used for InIRA because the induced error of interferometric phase can lead to unacceptable error of Sea Surface Height （SSH） measurement and its compression ratio is also quite low. Therefore， it is of great significance to study the onboard processing algorithm that compress the raw data volume under the premise of ensuring the accuracy of SSH measurement. The major contribution of our work can be summarized as： （1） a method for image registration and flat-earth removal based on target position estimation is proposed. Compared with the orbital parameter method， this method reduces computation complexity， and can remove the rapidly changing flat-earth fringe caused by small incidence angles. （2） a multi-look method is proposed based on interpolated average， which can reduce the SSH error compared with that using uniform window size. The ocean observation data obtained by Tiangong-2 InIRA is processed using the proposed method to verify the feasibility of the on-orbit data processing method and analyze its influence on SSH measurement accuracy. The result shows that the data compression ratio of the proposed method is 46.99 at 300m×300m on-orbit resolution. The standard deviation of the phase error and height measurement error are below 0.004 9°and 0.26 cm respectively at 5 km×5 km ground resolution. Compared with BAQ， this method has the advantages of high data compression ratio and small SSH measurement error， which is more suitable for the future new generation of wide-swath InIRA on-orbit data processing.