The market feels that the rising inflation could cause the central bank to withdraw liquidity sooner than expected," Anindya Das Gupta, head of treasury at Barclays Capital.
The 10-year benchmark bond, 6.90% maturing 2019 yield ended at the days high of 7.29%, above Wednesdays closing of 7.13%.
The yield had risen to a nine-month high of 7.38% on Monday, before falling as low as 7% on Wednesday as the central bank announced an out-of-turn bond buyback for Thursday.
Meanwhile, rupee recovered from an early fall to 1-1/2-month lows past 49 per dollar, helped by gains in the yen against other major currencies.
It ended at 48.91/92 per dollar, marginally stronger than its previous close of 48.93/94. It fell to 49.05 in early trade, its weakest since July 13. The dollars weakness helped sentiment. The rupees rise allowed some importers to unwind long-dollar positions," said a senior trader with a foreign bank.
Data on Wednesday showed that food prices surged an annual 13.3% in mid-August even as the overall wholesale price index fell.
Sentiment was also hurt after the Reserve Bank of India bought only Rs 2,657 crore of bonds at an auction where it had offered to buy up to Rs 6,000 crore.