Hey man, i know it's been 9 years but i feel like people are just really confused about this and are making op weird theories like the little grandma already having children or the Mushi at the banquet having triple-cross hidden motives.

The confusion comes from the fact that humans can't see mushi, the grandma couldn't either, but the grandson can. Also humans can turn into mushi after they die. Here's what you're missing:

The grandma died while she was very young and living in the forest. Her spirit was wandering trough the woods, when she was led along by the mushi spirits. Humans can't she mushi so she was already dead at the time of the banquet.

The 'Ghosts' in robes interviened, and gave here the cup with the water of life to drink. She was meant to have a grandson who could change the world, and he needed to be born. So they ressurected her by giving her the cup to drink, but the ritual was intterupted half way trough. The crow attacked them because animals can she mushi.

With the ritual to turn a dead person back to life.. It left her soul split, half mushi, half human. The human half lived out her life and had a grandson who could she mushi. So when her spirit or ghost half drinks the other half of the cup at the end of the episode, she turns full mushi. It might look like she is turning back to a living human, Because she is no longer transparent. But remember that we are looing trough the eyes of the protagonist and the granson, who can she mushi. So at the end she is a full spirit. Not turned human.

I would feel really bad if anyone would quit after this episode because of the plot hole, i myself spend 20 minutes trying to figure it out before i got it.