Prime Minister Narendra Modi's government said late on Tuesday that fares for city commuters will now effectively be frozen, reducing the savings it will see from the fare rises by an estimated 14 percent or some $180 million.
The decision will appease local politicians and voters in Mumbai ahead of local elections that Modi and his allies are expected to win. The largest number of India's suburban rail commuters are in Mumbai and they were angry at the hike.
"Political realities, political compulsions do rule at some point in India," said Tirthankar Patnaik, a strategist and economist at Religare Capital Markets. "The loss of a few crore is nothing compared to getting negative publicity."
The new government has said the country must cut subsidies which ballooned under the last administration if it is to lower the budget deficit and rebuild confidence in the economy.
But the realities of reducing subsidies - much of which flow to the 70 percent of Indians living on less than $2 per day and are spent on anything from diesel fuel to rice to transport - is far trickier.
Many Indians see the railways, which transport an estimated 25 million people each day, as a service for the "common man", making fare hikes for travellers particularly sensitive.
A previous plan to raise fares in 2012 and the ensuing backlash cost the then-railways minister his job.
Under plans announced on Friday for a 14.2 percent rise in passenger fares and a 6.5 percent increase in freight costs, India would have reduced its 260 billion rupees ($4.4 billion) railway subsidy bill by about 80 billion rupees.
After the rollback, the savings made will fall to around 69 billion rupees, analysts estimate.
"They've at least made a start, so the people are not as angry as they were anymore," said Sanjay Raut, a leader in the Shiv Sena party in the state of Maharashtra, which is allied with Modi's Bharatiya Janata Party.
"We will continue to ask for a reduction in the monthly pass fare as well, and our people in Delhi are speaking with the parliamentary parties on that. We are not planning any protests for now," he said.
Years of low investment and populist policies to subsidise fares at affordable levels have crimped growth in new railway lines, hindered private investment and limited much-needed improvements in safety. In the latest incident, four people were killed after a train derailed in the state of Bihar on Wednesday.
The government is expected to revive plans to open up parts of the railway to foreign investors, and analysts will be looking for any concrete signs of this when the government presents the railway budget on July 8. ($1 = 59.7000 Indian Rupees)