In New Delhi Rajapakse and Modi agreed to continue talks on a permanent solution to poaching, which has become a major irritant in relations.
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The two countries are separated by the narrow Palk Strait, which is also a rich fishing ground.
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The island's navy arrested the Indians on Sunday along with six trawlers, days after Rajapakse held talks with India's new Prime Minister Narendra Modi in New Delhi on poaching disputes and other issues.
"President Mahinda Rajapakse as a goodwill measure has ordered the release of 29 Indian fishermen arrested by the Sri Lanka navy while fishing in Sri Lankan waters," his office said in a statement.
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Official sources say the arrests had renewed tensions between fishing communities in the two South Asian neighbours.
Rajapak