What is bps?
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 also bond yields. .
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%.
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.
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.
