I feel that this is a huge violation of her sister's trust and I also agree that since grandma refuses to talk with her daughter, then she should not see this child unless the mother is present.
OMG. You have the right instinct, but getting your wife to see that viewpoint might prove troublesome; I hope not. Getting the idea expressed in a way that she can be open to is important; not so much of what you say, but HOW.
Good luck.