Still, the comments were not enough to derail expectations the Reserve Bank of India would deliver a 25 basis points cut in the repo rate after economic growth in the January-March quarter fell to a near nine-year low.
However, the comments contributed in keeping investors on edge, especially as they came after data on Thursday showed inflation accelerated to 7.55 percent in May, and ahead of pivotal Greek elections this weekend.
Bond yields have slumped around 15 basis points since the fiscal Q4 growth data out in late May, while the 1-year OIS swap rate has dropped 33 bps since then, as traders bet the RBI would again cut rates after already slashing the repo rate by 50 bps in April.
"You can't control inflation without sacrificing some growth," RBI Governor Duvvuri Subbarao said in a speech in Hyderabad on Thursday.
"So the message we try to convey is that this short term sacrifice of growth is a small price to pay for bringing down inflation, so that in medium term your growth is secure."
At 10:40 a.m. the benchmark 10-year bond yield was up 3 basis points at 8.36 percent.
India's one-year OIS rate rose 5 basis points to 7.59 percent, while the five-year rate edged up 3 basis points to 7.19 percent.
"Market had started moving up post the inflation numbers yesterday. Added to that, the governor's statement on inflation and the slight global risk-on sentiment today is all hurting bonds," said Ashish Parthasarthy, treasurer at HDFC Bank.
Traders said hopes for a 25 bps cut on Monday remain, though they have pared back expectations for a bigger 50 bps cut or a twin cut in the cash reserve ratio, or the money lenders must park with the central bank.
Markets would thus not react much if the RBI delivered a 25 bps rate cut but could rally by 5-10 bps with a bigger cut, they added.
No action would be the starkest scenario, with traders estimating the ensuing sell-off could send benchmark yields up to 8.50-55 percent should there be no action at all.
The new 10-year paper, which will soon be the benchmark, rose 2 bps on the day and could rise to around 8.25 percent, if the RBI stays pat, according to traders.
"This time the market positioning is not light, people have priced in the policy actions, so any significant divergence from the expected 25 bps, can cause the reaction to be exaggerated," HDFC's Parthasarthy said.