Short answer: A basis point, written as bps, is one-hundredth of a percentage point, or 0.01%. In decimal form it equals 0.0001, so a change of 25 bps is the same as a change of 0.25 percentage points, and the unit lets people talk precisely about small differences in rates and prices.
Last reviewed: 11 November 2026
At a glance
| Term | What it means | Where it appears |
|---|---|---|
| Basis point (bps) | One-hundredth of a percentage point (0.01%) | Small changes in interest rates and yields |
| Basis | The base difference or spread between two interest rates or prices | Gaps between two quoted rates or prices |
| 25 bps | The same as 0.25% | Expressing small changes, such as RBI policy rate moves |
| 0.0001 | One basis point in decimal form | Calculations and formulas |
| Bond yield | The interest rate a bond earns for its holder | Where basis points were first used |
Where does the word “basis” come from?
In finance, “basis” refers to the base difference or spread between two interest rates or prices. A basis point takes that idea and measures the spread in hundredths of a percentage point. The word therefore describes a gap, not a level.
The unit began in the bond market, where it was used to measure bond yields. Over time it spread to many other financial instruments, including loans and policy rates. Today the same unit is used across lending, borrowing and central bank communication.
How is a basis point calculated?
One percentage point is a full step on a percentage scale. For example, moving from 6% to 7% is a rise of one percentage point. Dividing that step into 100 equal parts gives one basis point, so one percentage point equals 100 bps.
To convert, multiply the percentage by 100. A 0.25% change is 25 bps, and a 0.50% change is 50 bps. In decimal form, one basis point is 0.0001, so a rate moving from 0.0800 to 0.0825 has risen by 25 bps.
How does the RBI use basis points?
The Reserve Bank of India (RBI) uses basis points to announce changes in its policy rates, such as the repo rate. The repo rate is the main policy rate the RBI sets, and it influences the interest rates that banks charge. When the RBI announces a change, the size of that change is stated in bps.
Stating a change in bps makes the announcement easier to read. A headline reading “25 bps” is clearer than “0.25%”, because the reader sees the size of the move without having to work out what fraction of a percent it is.
Why do analysts express small changes in bps?
Expressing small rate changes in bps reduces confusion and separates absolute changes from relative changes. An absolute change is the plain difference in percentage points. A relative change is that difference expressed as a share of the starting rate.
Consider a hypothetical rate moving from 5% to 5.25%. The absolute change is 0.25 percentage points, or 25 bps. The relative change is 0.25 divided by 5, which is 5%. Both numbers are correct, but they describe different things, and the bps figure keeps the two apart.
How do lenders quote loan rates in basis points?
Lenders often quote loan interest rates in bps. This helps borrowers compare loan options and find the cheapest one, because two offers can be read side by side in the same unit.
Here is a hypothetical example, with every figure invented for illustration. Suppose Loan A charges 9.50% a year and Loan B charges 9.75% a year, on a principal of Rs 50 lakh. The gap is 25 bps. On Rs 50 lakh, 25 bps works out to Rs 12,500 a year in interest, which is 50,00,000 multiplied by 0.0025.
What are the catches?
A bps figure on its own does not show the total cost of a loan. The total depends on the principal, the tenure and any fees, so a small-looking gap in bps can still add up to a large sum over many years. Comparing two loans only in bps can miss these other costs.
Relative and absolute changes can also be mixed up. A rise of 25 bps from a 5% rate is a 5% relative increase, which sounds larger than the 0.25 percentage point change it actually is. Reading the bps figure alongside the starting rate keeps the size of the move in view.
Frequently asked questions
Is a basis point the same as a percentage point?
No. A percentage point is a full step on a percentage scale, and one percentage point equals 100 basis points. A basis point is one-hundredth of a percentage point, or 0.01%.
Why does the RBI announce rate changes in basis points?
The RBI uses basis points to announce changes in its policy rates, such as the repo rate. Stating a change as 25 bps instead of 0.25% reduces confusion and makes the size of the move clear.
Where did basis points first get used?
Basis points were first used in the bond market to measure bond yields. The unit later spread to many other financial instruments.
Does a lower bps figure always mean a cheaper loan?
Not necessarily. Lenders quote rates in bps to help borrowers compare options, but the total cost also depends on the loan amount, the tenure and any fees, which a bps figure does not show on its own.
Sources and last check
Facts in this article were checked against the sources below on 11 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- icicidirect.com (broker education)
- kotakneo.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.