The Reserve Bank of India raised rates last week and initially sounded hawkish, but comments soon after from the central bank's governor boosted bond prices on the view that borrowing costs would not stay high for long.
But analysts say such an interpretation of Yaga Venugopal Reddy's remarks doesn't stack up with mounting evidence of inflationary pressures - a view they expect markets to increasingly take on board.
"The preconditions favouring the unwinding of rate tightening are unlikely to be met for several quarters, and the governor's comments on the matter were probably intended to highlight the low probability of a near-term reversal of rate tightening," JP Morgan said in a report.
The central bank raised its key short-term rate 25 basis points to 5.25 percent on October 25, warning it would be hard to keep inflation on target without raising rates due to high oil prices, strong consumption and buoyant economic growth.
That was a change from previous statements that had balanced containing price pressures with the need to support growth.
A day later, Reddy appeared to tone the message down, saying he expected rates to return to "normal" if his informal mandate of keeping annual inflation below 5 percent was achieved.
Yields on the popular 16-year bond responded by falling to 7.4403 percent from 7.4551 percent as traders interpreted Reddy's words to mean rates would not stay up at the new level for long. They had edged back to 7.4486 percent by Friday.
In addition, the yield curve flattened after Reddy's comments, with the spread between the 16-year bond and the one-year treasury bill narrowing to 166 basis points from 169 basis points.
But analysts said bonds will find it difficult to resist pressure for higher yields.
Wages are rising and manufacturers are passing on higher costs to consumers in an economy where growth is running at around 7 percent, one of the fastest rates in the world.
Analysts expect closely watched wholesale inflation to increase to 6 percent by the end of March, the close of the current fiscal year, from 4.5 percent now. That would be higher than the central bank's target of limiting inflation to 5.0-5.5 percent by the end of this fiscal year.
Analysts said that in some regards the central bank would not be keen to see higher bond yields, since it has to push through plans by the government to borrow $10 billion between November and March to help plug the budget deficit.