While you are selecting the packages you want to install during the cygwin installation process select rxvt(only available in 32-bit cygwin as of 9/16/2014).
Place the .Xdefaults and .bashrc file in your cygwin home folder (~/)
Instead of using the default cygwin shortcut, create a new shortcut with the following:
C:\cygwin\bin\rxvt.exe -e /bin/bash --login -i
Enjoy a usable terminal
Update Just found out about mintty - https://code.google.com/p/mintty/. Will leave this here is incase anyone is interested in rxvt still.