I have a SIL who insists on giving everyone she knows her baby's old clothes. It's great- but she expects everyone to return all the clothes so she can pass them on to someone else when you're done with them. I can understand that she just likes to help out as many people as possible, but its a pain in the butt. I've received so many hand-outs, I've had to label all the clothes from her so I remember which ones I need to gather up and return afterward.
Isn't the norm just to pass them on once, let the person do with them what they will and be glad you got rid of them?? Each to their own i suppose....

Oh- and about the Grandma, tell her you appreciate the offer but that you want all new stuff that matches and that you are HAPPY to spend the money (coz they just can't get their head around you not wanting to save money), and that you will receive a nice baby-bonus from the Government anyway (whether or not that is true).
Perhaps you can send her the details about a charity that is always in need of 2nd hand baby gear- that way she can at least feel like she has helped someone out...