A Basis point bps is defined as 1/100th of one per cent or 0.01 per cent. The importance of using this metric is that it becomes convenient to avoid confusion in case of a change in interest rate or fee, even by a small fraction of a per cent. For instance, it is more convenient to state that "repo rate has declined by 25 basis points" instead of saying "repo rate has fallen by 0.25 percentage points," especially in case of many interest rates. This article highlights the meaning of the term "basis point," ways of calculating it, applications of basis points in the financial world, and the difference between the basis point and the percentage point.
How to Calculate Basis Points
The calculation is easy:
- Basis Points = Change in Percentage x 100
- Alternatively, for the opposite direction:
- Percentage = Basis Points ÷ 100
- Now, using an example of a shift from 6.00% to 6.25%:
- Calculate the difference: 6.25% - 6.00% = 0.25%
- Multiplying by 100: 0.25 x 100 = 25 bps
So a 0.25% change equals 25 basis points. Some quick conversions worth remembering:
- 1 bps = 0.01%
- 10 bps = 0.10%
- 50 bps = 0.50%
- 100 bps = 1.00%
Once you know that 100 bps always equals 1%, converting between the two becomes simple mental maths.
Examples of Basis Points in Finance
Suppose the bank offers a fixed deposit at a rate of 6.50%, which later rises to 6.75%. This is because there has been an increase of 25 bps in this. Similarly, if the expense ratio of a mutual fund is 1.20% and then it falls to 1.05%, this is because it has fallen by 15 bps.
This can also be seen in the yields of the bonds. For instance, the 10-year yield of the government bond rises from 7.10% to 7.35%. This is because there is a rise of 25 bps in it, and usually, when the yield rises, the price of the bond falls. In case of loans, the borrower is getting a benefit of 25 bps when the lender reduces the home loan rate from 8.60% to 8.35%.
Where are Basis Points Used?
Basis points are widely used across the finance industry.
Interest Rates and Loans
Central banks set policy rates in basis points, and banks adjust home loan, personal loan, and car loan rates in the same unit.
Bonds and Fixed Income
Bond yields, credit spreads, and coupon rates are quoted in bps because even a small shift can affect large portfolios significantly.
Mutual Funds and Investing
Expense ratios, exit loads, and tracking error in index funds are usually expressed in basis points rather than percentages.
Foreign Exchange
Basis points are more commonly used for interest rate differentials, forward premiums, and FX swap markets, rather than spot currency movements.
Credit Cards and Fees
Processing fees, late payment charges, and card network fees are sometimes described in bps, particularly in merchant agreements.
Why are Basis Points Important?
Here’s why basis points are critical.
- They give precision. A 0.01% difference can matter on large sums, and bps make that difference easy to state.
- They avoid confusion. Saying "rates rose by 1%" point (100 bps), while a rise from 5% to 5.05% is an increase of 5 basis points. Basis points remove that ambiguity.
- They help compare products. Two fixed deposits offering "similar" rates might differ by 10–15 bps, which adds up over years.
- Even small changes in BPS have a major impact. On a large loan portfolio, even 10 bps can translate into a meaningful sum.
How Basis Points Help Measure Risk and Returns
When it comes to fixed income securities and loans, basis points become the basic unit of measurement used when measuring risk. Credit spreads, which are basically the excess yields charged above government bond yield to account for risk, are measured in basis points. A widening credit spread generally reflects higher perceived credit risk or increased market risk, although changes in liquidity and broader market conditions may also contribute. Basis point risk and Price Value of basis points (PVBP are another important measures used by fund managers to determine the changes in value of bonds due to changes in interest rates. An interest rate increase of even 25 bps may result in changes in the profits from loans when multiplied by the number of customers.
Recent RBI and Global Interest Rate Changes in Basis Points
The Repo rate has been cut 4 times up to 2025, for an aggregate decrease of 125 basis points, from 6.50% to 5.25%. Since then, the MPC has kept the Repo rate at 5.25% during their meetings in February, April, and June 2026, maintaining a neutral position as they await inflation and other external signals. The next MPC meeting is set to take place in early August 2026.
Globally, the US Federal Reserve reduced the rate by 25 bps in December 2025, bringing the federal funds rate to 3.50% - 3.75%, marking the third cut by the Federal Reserve for the year and a total reduction of 75 bps. As at July 2026, the federal funds rate range as determined by the Federal Reserve has not changed despite there being a very high probability of an increase in the rate by 25 bps owing to the inflation rate exceeding target rates during the upcoming meeting on 28th/29th July.
Basis Points vs Percentage Points
Aspect | Basis Points (bps) | Percentage Points (pp) |
Value | 1 bps = 0.01% | 1 pp = 1% |
Use case | Small, precise changes | Larger, rounder changes |
Common in | Bonds, loans, fund fees | General rate comparisons |
Example | Rate rises 25 bps (0.25%) | Rate rises 2 pp (2%) |
A percentage point is simply the plain difference between two percentages. If unemployment moves from 5% to 7%, that's a 2 percentage point rise. Basis points are used when the change is small enough that percentage points would feel imprecise or clumsy to state.
Conclusion
The concept of basis points provides a standardised system of quantifying changes in interest rates that otherwise would have been difficult to communicate using percentages. Irrespective of whether it is the RBI changing the repo rate, the bank changing loan rates, or the mutual fund modifying the expense ratio, basis points help measure the changes quickly and simply. So, understanding BPS and its importance is important for every investor.
FAQs on Basis Points (BPS)
How much is 1 basis point?
1 basis point equals 0.01% or 1/100 percent.
What is the distinction between basis points and percentage points?
Percentage points mean one whole unit of 1%, whereas basis points mean 1/100 of a percentage point or 0.01%.
What does it mean by an increase of 25 basis points?
It means there was an increase of 0.25%. An example is an increase in interest rate of a loan from 8.00% to 8.25% means there was an increase of 25 bps.
How are basis points used in bond investing?
Yields of bonds, coupon rates, and credit spreads are quoted in basis points since even a slight movement in bps could affect the pricing of bonds.
Are basis points used only for interest rates?
No, basis points are also used in other instances such as mutual funds' expense ratio, mutual funds' exit load, credit spreads, currency exchange, and several types of charges.
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