RPT-UPDATE 1-India cbank to continue with FX flexibility

(Repeats story issued late on Thursday) (Adds more quotes, details and background)

By Tamajit Pain

KOLKATA, India Dec 13 (Reuters) - India's central bank will continue to allow greater flexibility in the foreign exchange rate but will also intervene to keep the rupee stable, its deputy chief said on Thursday.

Rakesh Mohan, deputy governor of the Reserve Bank of India, said foreign exchange rates now were "just right ... (considering) the current account gap".

"In the last 3-4 years, we have been allowing greater flexibility in the forex rate and we want to continue with that," Mohan told a seminar in the eastern city of Kolkata.

"We would like to have a system of exchange rate which is determined by the market on a reasonable volatility. But we would keep intervening to keep (the exchange) rate stable."

The Reserve Bank of India bought almost $52 billion in the first nine months of 2007 to curb rupee gains against the dollar.

The local unit has risen about 12 percent this year but eased on Thursday to close at 39.395/405 per dollar INR=IN, slipping from the previous day's 39.375/385.

Mohan said the central bank needed to manage capital inflows judiciously as the current account deficit was relatively small at about $10-15 billion.

Officials are finding it difficult to manage large inflows with foreign funds pumping nearly $17 billion into local stocks so far this year.

The central bank has repeatedly raised the cash reserve ratio and sold market intervention bonds to soak up the surplus cash with banks generated by its intervention.

On the implication of this week's interest rate cut by the U.S. Federal Reserve, Mohan said: "It is not necessarily totally correct that India-U.S. rate spread is causing more forex inflows."

He said the central bank was watching the U.S. subprime issue closely and added it had led to an increase in uncertainties in the financial market.

Mohan said rate cuts by the Fed and some other central banks to increase liquidity was "unprecedented".

He said the RBI aimed to keep inflation at an average 3 percent in the longer term as the country moved to fuller capital account convertibility.

"We have been able to successfully reduce the average inflation rate to 4-5 percent in the last five years from an average of 7 percent and now our immediate aim is to contain it to an average 4-4.5 percent."

He reiterated that the central bank was sticking to its growth forecast of 8.5 percent for the fiscal year which ends in March 2008.

(Additional reporting by Rajkumar Ray) ($1=39.4 rupees) (Writing by Surojit Gupta; Editing by Mark Williams)