Basis Point

A basis point (bps, pronounced "bips") equals 0.01%, or one-hundredth of a percentage point. When the RBI raises the repo rate by 25 basis points, it means the rate increases by 0.25% — for example, from 6.50% to 6.75%.

Basis points exist to eliminate ambiguity when discussing percentage changes. Saying a bond yield "increased by 1%" is confusing — does it mean the yield went from 7% to 8% (a 100 bps move) or from 7% to 7.07% (a 1% relative increase)? Using basis points removes this confusion entirely.

In Indian markets, basis points are used extensively. RBI monetary policy decisions are expressed in basis points — the Monetary Policy Committee (MPC) typically moves the repo rate in increments of 25 bps. Bond yields on government securities (G-Secs) fluctuate by 2-10 bps daily. Mutual fund Expense Ratio differences are measured in basis points: a direct plan charging 0.30% vs a regular plan at 1.50% has a 120 bps difference, which compounds significantly over decades.

For fixed-income investors, basis points directly translate to money. On a Rs 1 crore government bond portfolio, a 10 bps yield change translates to approximately Rs 1,000 annually. For banks and institutional investors managing thousands of crores, even a 1 bps difference in rates represents significant profit or loss.

Stock market impact from RBI rate changes is well-documented. A surprise 50 bps rate cut typically triggers a 1-3% rally in the Nifty 50, with rate-sensitive sectors like banking, real estate, and auto outperforming. Conversely, unexpected rate hikes pressure equity valuations through higher discount rates and increased borrowing costs.