Small savings are the lifeblood of India's low- and middle-income groups, and cutting interest rates would have dealt a severe blow to hundreds of millions of Indians at a time when many have lost jobs and faced pay cuts amid the pandemic.
"India shall continue to be at the rates which existed in the last quarter of 2020-2021, i.e., rates that prevailed as of March 2021," Sitharaman said in a tweet on Thursday.
"Orders issued by oversight shall be withdrawn," she said.
Opposition leaders said the rollback was due to a potential backlash from voters in state assembly elections. Two eastern states have begun voting, and two southern states will vote next week.
"'Oversight' in issuing the order to decrease interest rates on Government of India schemes or election driven 'hindsight' in withdrawing it?" Priyanka Gandhi Vadra, a member of the opposition Congress party, said in a tweet to Sitharaman.
A day earlier, on the last day of the 2020/21 financial year, India had cut interest rates on small savings by up to 1.1% for the June quarter. The government reviews interest rates on government-backed schemes every quarter.
Prime Minister Narendra Modi's federal government has attempted to link state-backed small savings rates with yields on government bonds every 3 months.
However, interest rates have largely been kept above market rates, which experts say is due to fear of a backlash from middle class voters.
(Editing by Simon Cameron-Moore and Gerry Doyle)
By Sudarshan Varadhan and Aftab Ahmed