Last time I saw her she was asked to leave the baby alone while she was sleeping…she didn’t
Later on she had been cuddling the baby for awhile and we asked for her back and she grinned and moved the baby away and acted shocked as to why…she still didn’t give her back.
YANBU to find this annoying & disconcerting OP.
But you are allowing her to do it, so complaining & feeling upset are getting you nowhere. You have to use your words, & the sooner you do it, the less engrained her habit of undermining you will become.
"MiL, I asked you to leave the baby alone while sleeping. If you are unable to do that, I'll have to treat you like a child who can't be trusted. Do you want that, or do you want to listen to me the first time I ask?"
"MiL, I asked you to hand the baby back. I know you're not deaf, so what are you playing at? Keep this nonsense up & I'll be asking you to leave."
You need her to understand that this is your baby & you call ALL of the shots. You need to make sure you fully believe it yourself though ... which can't be easy when your own DP doesn't have your back.
The first time is the hardest, & MiL will kick off.
When she does, make sure you have a useful phrase to trot out on repeat (Broken Record technique) until she shuts up or goes away - something like -
"I've said what needs saying, this isn't about you, it's about what I say is best for baby."
I see it's at her house.
All the above still applies - you just pick yourself & baby up & leave - every time she pulls this shit.
The refusing to hand back your baby & smirking at you while she does it is a classic dominance display btw. Cut that shit dead by removing yourself & your baby when she pulls stunts like that - again, along the lines of -
"You are refusing to hear me, this is my baby & my decision, we're leaving now"
Do it, & schedule a BIG chat with DH about why he is enabling his mother to undermine his wife.