My personal take on this would be that this was my grandfather's attempt to personalize and customize his knife. A lot of guys did that during World War II, depending on where they were and what kind of materials they had access to.
I don't know if your grandfather was in World War II or not, but I would at least think that he was influenced by "Theatre Knives" as they are known. Theater Knives are basically modifications made to knives to make them more functional or more appealing to the user. Or in some cases just to establish who the knife belong to.
Someone once said; "Combat is days of sheer boredom, punctuated by moments of absolute terror!"
I am sure this was the case in the trenches of World War 1. There is a lot of "Trench Art" that was produced in World War I because there was so much boredom among the troops. Soldiers would whittle wooden figures, make lamps from shell cases and all sorts of things primarily for the purpose of passing time.
A friend of my father's was a prisoner in World War II in the infamous Stalag 13. I remember one time he showed my dad and I a wooden picture frame that held the pictures of his children which his wife had sent him. He had whittled it from pieces of wooden shipping boxes. It was held together with wooden pegs which he also whittled. It was whittled from pieces of wooden boxes, probably from the Red Cross, that were sent to the prisoners. The Germans that allowed him to keep a small pocket knife and that's what he used to whittle the frame with, and as I recall a number of other small wooden objects.
If it were my grandfather's knife I would want to know the story behind it before I changed anything. There may be a very significant reason why he painted it and why chose the color he did.
That's my two cents worth.