The world number one, chasing a 63rd career title and a 44th on clay, has not been on top form on his favoured surface this year, suffering surprise defeats in the quarter-finals at Monte Carlo and Barcelona.
However, he has shown glimpses of his dominant best in front of adoring fans in the Spanish capital, where he is yet to drop a set, as he warms up for a tilt at a record-extending ninth French Open title starting at the end of the month.
Nadal's victory against the unheralded Bautista ended the world number 45's best run at a Masters event and secured a place in the final where he will play Nishikori, who edged past another Spaniard, fifth seed David Ferrer, 7-6 5-7 6-3.
The Japanese 10th seed, who won his first clay title in Barcelona last month, is through to his debut Masters final and will become the first man from the Asian nation to break into the top 10 when the rankings are updated on Monday.
Nadal, who has beaten Nishikori in all six of their meetings, said his semi-final performance against Bautista was further confirmation of his improving form after Friday's fine win against sixth-ranked Czech Tomas Berdych in the last eight.
"After I think a great match yesterday, to have the confirmation today that the improvement is real is very good news for me," he told a news conference.
"And being in a final here in a difficult tournament at home after losing two weeks in a row in the quarter-finals means a lot to me," added the 27-year-old Majorcan, who was also champion in Madrid in 2010 and in 2005 when it was an indoor hard court event.
"This is great news in order to go out and play tomorrow's match but also for what may come in the future."
Nadal broke Bautista's serve in the opening game at the Magic Box arena but his gutsy compatriot fought back to level at 3-3 before immediately losing his serve again.
Bautista looked to have crumbled in the face of a barrage of fierce Nadal drives in the second set but raised his game to break for 4-2.
Nadal, who will be contesting his 90th career final on Sunday, broke serve for a fifth time in the ninth game and sealed victory on his first match point with a rasping forehand down the line.
Bautista will break into the top 30 for the first time thanks to his performance in Madrid.
He upset Argentine Juan Martin del Potro at this year's Australian Open and claimed a second top-10 scalp of the season when he beat Berdych in the second round at the Indian Wells Masters event.
"It's been a beautiful week for me," Bautista said.
"I have the feeling that I could have played today's match a little bit better," added the 26-year-old, who was facing Nadal for the first time.
"I'm happy with what I've been doing recently so I hope that the rest will keep on going in the same way."
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