"RBI had warned that any user, holder, investor and trader dealing with virtual currencies would be doing so at his/her own risk"
They never said its illegal but they said that it isn't regulated by govt or RBI so anyone using bitcoin will fully responsible for their loss using this type of currencies.
I wouldn't have bothered to post here if that's the case, but it looks like this article has been edited since the time I've made this post. The title was "Use of Bitcoin illegal, says govt" which is now changed to "Use of Bitcoin, other virtual currencies not authorised by RBI, says govt."