Various research groups across the globe have developed models for engine condition monitoring and fault diagnosis based on the data from steady state performance measurements over the last two decade. However, these performance data are not amenable for easy collection in some situations and some of the data may show little performance deviation at the steady state conditions of operation. The aim of this study is to identify engine operating conditions and parameters that can be used to develop a diagnostic tool for internal combustion (CI) engine running on biodiesel blends fuel. Ricardo Wave Software was used to stimulate healthy and degraded engine. The degraded condition of operation was created by forcing one injector to work with 90%, 80% and 70% of the normal fuel flow efficiency. The measurable performance parameters such as brake power, brake torque and exhaust temperature and CO emission have been used to compare the deviations during steady and transient condition. From the comparison of the data obtained from transient and steady state simulation of the engine with and without injector fault, it can be concluded that the transient parameters show higher deviations and hence are better suited for condition monitoring and diagnostic modelling in engine working speed.