Whenever there is a policy rate changes
by RBI, we read this ''term" in newspapers. The best point is
that most of the newspapers also explain the same in one sentence in the same
paragraph. It is a very simple concept and meaning.

In financial terms, 'one'
Basis
Point is a unit equivalent to 0.01% i.e. 1/100th of a
percent. Thus 10 bps means 0.10% and 100 bps
means 1%. BPs is mostly used to indicate the changes in
interest rates
and alsobondyields.
.

Thus, when news comes that RBI has reduced Repo rate by 25 bps, you should know
that it has been reduced by 0.25%, i.e. if the earlier Repo Rate was 4.50%, the
new rate will be 4.25%. Similarly, if you read in the newspaper that bond
yields of 10 year GoI Bonds have gone up by 20 bps in last one month, it
means that the yield on bonds have gone up by 0.20%. Thus, if the a
month ago, the yield on 10 year GoI Bonds was 7.90%, the current yield on bonds
will be 8.10%.

Ads by Google

So, a bond whose yield increases from
5% to 5.5% is said to increase by 50 basis points; or interest rates that have
risen 1% are said to have increased by 100 basis points.

For example, if the
RBI raises
interest rates by 25 basis points, it means that rates have risen by 0.25%
percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or
25 basis points, the new interest rate would be 2.75%

We have already
explained that Basis Point is used for interest rates, but sometimes these days
it is used to indicate the changes in the stock too, e.g. some say the stock
index has gone up by 150 bps, which clearly means that there is an increase of
1.50% in the value of the stock index.

You can give your feedback / comments about this Article. Please give only relevant comments as irrelevant comments are
waste of time for yourself and our other readers.