This is an educated guess on my part, but it is based on the following personal experience:
1. I know several astronauts, including a Mercury astronaut, and I have had a long talk with this gentleman about Randall knives and the relationship between the Mercury astronauts and RMK. At the time of this discussion, he had lost touch with RMK and I put him back in touch with Gary Randall.
2. I was not part of the 1999 expedition that recovered the Liberty Bell 7, but I was on the 2001 follow up expedition to the same area with Curt Newport, the leader of that expedition. We discovered the world's deepest wooden shipwreck, a slave ship lost in 1810. I made a deep submersible dive to this wreck and recovered several objects, including a man's boot and other leather objects, which were remarkably well preserved.
3. I discussed the recovery of Grissom's knife with Newport, and the recovery is also discussed in his book "Lost Spacecraft," which I own. The knife was recovered in the muck in the bottom of the space capsule. There was no leather sheath.
4. As Newport described in his book, ownership of the spacecraft (and any contents purchased or provided by NASA) remained with the U.S. Government, specifically NASA, and the Smithsonian had the right of first refusal to acquire any items recovered. However, NASA transferred title to the capsule and its contents to the Discovery Channel Network before the recovery, the Smithsonian signed off on this transfer, and Discovery donated the capsule to the Kansas Cosmosphere, where restoration of the items recovered subsequently took place and the artifacts were displayed before going on tour to various museums around the country.
5. Given the history of the Liberty Bell 7 artifacts after their recovery and the close personal relationship the Mercury astronauts enjoyed with the Randall family, my best guess is that the knife on display in Indiana is not the knife flown on Liberty Bell 7, but is another personal knife that Grissom obtained from RMK. If it is the LB7 knife, the sheath was provided with the knife and was not flown. However, I doubt that this is the LB7 knife.