OP -congrats on your DD. Hope you're not upset by the strength of feeling on here though.
I'm afraid I's also be in camp furious though -it seems a very insensitive thing to do to your niece, your SIL & BIL, & the GPs.
I very deliberately avoided all names remotely similar to my nephews & cousins' children, even to my stepson's half sister on other side, even those who live in Australia, meaning I parked several names I otherwise liked. I didn't want anyone having to list their grandkids/ siblings/ cousins & sounding silly.
Plus All GPs struggle to get their grandkids names right sometimes- & you've made that s bit harder/ easier depending in which way you look at it
No regrets, I found another lovely name & my family adore her. I'm guessing your SIL now won't be putting her new neice at the top of the special prezzie list every Christmas, which is s shame.
Honestly, up to you, bur I would probably apologise and/ or change the name.
Bur most of all, enjoy your DD