Basis Point

Meaning:

A basis point (bps) is a standardized unit of measure used in finance to quantify  changes in interest rates, yields, or other financial percentages. One basis point is defined as

0.01% (one-hundredth of a percent), which implies that 100 basis points equate to a full  percentage point (1%).

Example: 

For instance, if the Reserve Bank of India (RBI) raises the repo rate from 6.50% to  6.75%, this change represents an increase of 25 basis points. Similarly, if a bond yield falls

from 7.10% to 6.95%, it has decreased by 15 basis points.

How to understand basis points:

Basis points provide a precise and unambiguous method for discussing minor fluctuations in  interest rates and financial returns.

For example, if your loan interest rate increases from 8.00% to 8.50%, this change is  quantified as 50 basis points (or 0.50%).

Importance of Basis Points:

They facilitate easier comparisons of rates and financial metrics, allowing investors, bankers,  and policymakers to communicate small changes clearly and effectively.

Basis points enhance clarity in financial reports, especially when multiple percentage changes  occur simultaneously.

They serve as a standard unit of measure in global finance, widely used by central banks,  investors, and financial analysts to ensure consistent communication and understanding.