L.L.
He still thinks it's ok, because he still thinks of her as his little baby granddaughter. I would tell him that you are trying to teach her modesty and explain to her that as she gets older the rules change a bit. I remember when I was growing up I was so close to my grandfather "pepere" and then one day i was too old to stay in his room when I spent the night and had to go to the spare room. There was never anything inappropriate just a very close bond between a grandparent and his granddaughter.