I think you have to accept that your mother will not accept reasonable boundaries.
Therefore the price you pay for free babysitting is the knowledge that your child might be returned with a new haircut, or new religion, or whatever you mother comes up with next. Basically, then, it's up to you to decide if you're willing to pay the price.
Personally, I'd stick with supervised visits to the grandparents, and find someone I can use as a babysitter for the occasional time away - friends, fellow parents, but something other than your parents, at least until your kids are old enough to stand up for themselves.
POD to this. You say that you understand she does not respect boundaries, but that you're willing to put up with that so your children can have a rel@tionship with her. If that's the case, I don't think there's anything you can really do when she pulls a stunt like this--you can try telling her how much you dislike what she did, but as you know, this doesn't really do any good.
The only thing that
might help is what others have said--not allowing her access to the children, at least unsupervised. She may or may not behave better if she sees this consequence to her actions; but at least she won't be able to get away with much/anything if the kids aren't with her unsupervised.
I think the upshot is, if you don't want to limit the children's contact with her, or at least only let her see them while supervised, this is what is going to keep happening. You have seen for yourself that she isn't going to abide by reasonable "common sense" limits, she isn't going to follow any rules you set, and even if you went to the extreme step of making a "contract" that she claims she agrees to, you have indicated she will find a way around that. I think you will either have to accept this and thus accept that your children may have experiences with her you don't approve of, or you have to keep the children away from her.
As an aside, my grandmother used to cut my hair without my parents' permission also, for YEARS.

I remember it happening. She would wash it first at the sink and everything. And my mom (her DIL)
hated it, partly because she always cut my bangs crooked. But my mom never took a stand on it, for whatever reason. So it might be more common than it seems.