Percent, percentage points and basis points explained

Three ways to say a rate changed

Rate headlines use three vocabularies, and mixing them up leads to wrong conclusions.

• Percent (%) of a quantity: 10% of ₹1,000 is ₹100.
• Percentage points (pp): the plain subtraction of one rate from another.
• Basis points (bps): one hundredth of a percentage point. 100 bps = 1 pp.

Percentage points: the subtraction

If an FD rate moves from 7.5% to 7.0%, it fell by 0.5 percentage points, which is 50 basis points. The headline might say "FD rates cut by 50 bps" or "by half a per cent". Both mean the same thing here: 0.5 pp.

A policy rate change from 6.50% to 6.25% is 25 bps, or 0.25 pp.

Percent change: relative to the start

Now take a fund's yearly return that falls from 12% to 9%. The change is:

• 3 percentage points, the subtraction.
• 25 per cent, because 3 ÷ 12 = 0.25. The return fell by a quarter of its previous size.

Both statements are true. They answer different questions, so a headline that says "returns fell 25%" and one that says "returns fell 3%" can describe the same event. The first is relative, the second is in points.

Why the difference matters

Inflation. A move from 5% to 6% is 1 percentage point, but a 20% relative rise (1 ÷ 5). Saying "inflation rose 20%" sounds alarming; "inflation rose 1 point" is closer to what people experience.

Expense ratios. A regular plan charging 1.5% and a direct plan charging 1.0% differ by 0.5 pp, or 50 bps. In relative terms the direct plan costs a third less (0.5 ÷ 1.5). Both are fair descriptions, but the cost to you is the 0.5 pp every year, which compounds, as shown in the impact-of-1-percent walkthrough. The direct vs regular calculator puts it in rupees.

Loan rates. A cut from 8.50% to 8.25% is 25 bps. In relative terms it is under 3%, which is why a rate cut feels bigger in the news than it does in the EMI. Test your own loan on the home loan EMI calculator.

A trap with gains and losses

Percent changes do not cancel. Rise 10% from ₹1,00,000 and you reach ₹1,10,000. Fall 10% from there and you reach ₹99,000, not ₹1,00,000. The base changed between the two moves. This is the same effect behind why a 50% fall needs a 100% gain, and why CAGR and absolute return are not interchangeable.

A quick checklist

1. Find the unit. Is the number a percent, a percentage-point change or basis points?
2. Find the base. A relative change needs a starting value. Without it, you cannot judge size.
3. Convert to rupees. A 0.25 pp change on a ₹50 lakh loan, or 0.5 pp on a ₹10 lakh fund, is a number you can feel.
4. Be careful adding and chaining. Percentage changes multiply; they do not add.

This post is educational, not financial advice. The rates used are examples to illustrate the arithmetic and are not current quotes.