I think it's reasonable for you to be miffed, and if it were me I'd also be wondering what to do in the future.
If I gave a gift to an adult who chose to give it away I might very well choose not to gift them again, but in this case the child didn't choose to give away her gift, it was taken away and given to another child. I admit I'd lean toward giving each of the kids a gift - if you continue to give clothing - that can be worn by that child at that time, no more 'grow into' things.
I understand why the grandparents are concerned about providing clothing and that it seems more practical to have clothes that both girls can (eventually) wear, but the younger one needs a few special things that are hers when they are new. Maybe, if finances allow, for a birthday or Christmas you could get each of the girls one item just for them (fits, good color, etc.) and a few pieces from a thrift store or yard sale that will be shared clothes.