I would be hopping mad about this. I think there is a key difference between re-baptizing in a second denomination and baptizing into a different faith. The issue with the first is that it's silly and theologically inappropriate - it's bad because the grandma disregarded the parents' wishes, but presumably they wouldn't be offended by the baptism itself because their chirch would consider a baptism in her faith to be equally valid. The issue with baptizing into a different faith entirely is that baptism is a promise to god that you're going to raise that child as Christian (with more or less specificity for denomination depending on how you interpret that). The parents have already made it clear they will NOT raise the kid Christian - so not only is the grandmother going behind their backs, she'd be going behind their backs on an extremely important issue and she'd be making the promise to continue to do so. Not cool.
(A friend of mine from college had parents from two different faiths, but grew up in her father's tradition. Her mother's family had her baptized in absentia, against her will, when she was a teenager. She never really forgave them for it. She has no intention of practicing their beliefs, but they feel they "won" because she can't un-baptize herself and thus they believe she'll have the afterlife their faith believes in, no matter how she feels about it. They felt this was important enough that they were willing to ruin their earthly relationship with her to save her soul. Yeah, definitely not cool.)