I strictly have not faced any problem with those rej and orig files being present in the .hgignore. I also thought keeping the .hgignore in the repo was for distribution and never knew that it can affect local views (If you remove .rej and .orig your local version, will it help?)

Yes, mercurial presents us with a list of files are that being added/committed, so we can be careful in not add those spurious leftovers. But at a time when you want to be fast with doing everything via cli options you are at a risk of adding unwanted files (unless protected by .hgignore file).

I see that .hgignore can ignore itself. So, once commited with itself to ignore, I believe people can have personal customization in there. This suggestion is with the understanding that repo/.hgignore is just to distribution and does not affect hg tracking behavior. Please correct me if I am wrong here.