I think for a dog lover, a dog is like a part of a family. it's either u ignore and try to understand that or u jus tell her that you have already thought of a name for your baby. u might feel offended but names are jus names. it's either u tell her straight that u don't like or jus ignore.
Sorry to say but tell your MIL your rainbow is not a dog and it is a human and soon to be grandchild. So no way LO will be name after a dog. Even if it is a joke but thats offending.
I would be offended too. But try to ignore it and give your MIL the benefit of the doubt that she means well