I think if I were in your situation, I wouldn't be able to keep my mouth shut! That makes me angry that your mil did this to her own g-child! Some words that I normally don't use are coming to mind.
I feel very bad for Rach. To be treated like this by someone that you love is painful. I hope she is okay.
I am sorry you are both having to deal with this. I honestly don't know what you should do. Saying something might make things worse. On the other hand you want to stand up for your child and let her know that this is not acceptable and it will not happen again.