Slogan shouting activists of the Students' United Movement of All Arunachal (SUMAA) marched from Ganga to Mithun Gate here with banners and posters that demanded roll back of the government's decision.
The SUMAA asserted that indigenous tribal population of the state would suffer if the policy was implemented.
"We will continue to protest till the government rolls back its decision on the Tibetan Rehabilitation Policy," SUMAA president Tagru Tame told reporters.
The district administration had on Monday declared the rally as "illegal".
The state cabinet, during its August 12 sitting, had decided to implement the central policy.
According to the guidelines of the policy, Tibetans would be allowed to undertake economic activities relevant permits would be issued to them. The policy would also allow them to take up jobs if they were professionally qualified.
The state government had issued a statement yesterday stating that it would look into the interest of the state and its indigenous population before implementing the policy.
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