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Co-authored-by: prasadkarmalkar <prasadkarmalkar@git.wordpress.org>
Co-authored-by: Mamaduka <mamaduka@git.wordpress.org>

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Thanks for contributing, @prasadkarmalkar!

The following change works in my tests and matches how the default selected value is set for categories. Though I've not tested this intensively, only with default taxonomies.

diff --git a/packages/block-library/src/categories/index.php b/packages/block-library/src/categories/index.php
index 518918c8a1c..6e742422983 100644
--- a/packages/block-library/src/categories/index.php
+++ b/packages/block-library/src/categories/index.php
@@ -40,6 +40,7 @@ function render_block_core_categories( $attributes, $content, $block ) {
 		$id                       = 'wp-block-categories-' . $block_id;
 		$args['id']               = $id;
 		$args['name']             = $taxonomy->query_var;
+		$args['selected']         = get_query_var( $taxonomy->query_var );
 		$args['value_field']      = 'slug';
 		$args['show_option_none'] = sprintf(
 			/* translators: %s: taxonomy's singular name */