There is no illegality as of now for trading in cryptocurrency in India. However, arbitrage arises when you are buying/selling cryptocurrency abroad and selling/buying them in India to get the benefit of changes in the rates. It implies that there may be usage of foreign exchange.
Let me reiterate my earlier views on this issue in response to another similar query.
There is no specific provision prohibiting foreign exchange transactions for the purpose of bitcoin dealings. Under the Liberalised Remittance Scheme (LRS) of the RBI, a resident individual can remit upto 2 L US$ per FY and he will be free to acquire and hold immovable property or shares, units of Mutual Funds or any other asset outside India and will also be able to open and maintain and hold foreign currency accounts with a bank outside India for making remittances under the scheme. You may refer to the following link: https://seller.currencykart.com/assets/uploads/rbi-rule.pdf
Bitcoins cannot be used as a currency under the present regulations as the definition of currency does not include Virtual Currencies. Thus you are acquiring bitcoins as moveable asset and not as a currency that can be used as a legal tender for the monetary transactions. However, as there is spurt in the trading of Bitcoins, RBI has been cautioning the investors about the risks involved. You may also like to go through the latest advisory of the RBI at the following link:
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=42462
You may also go through an interesting speech by the Deputy Governor of RBI at the following link:
https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1036
Now that the Finance Minister also indicated that virtual currencies are not legal tenders, I expect that there may be restrictions on buying /selling bitcoins in the near future to protect the interests of the gullible investors.