You need to invoke the ClearCachedDataSource() method. ClearCachedDataSource method is used to clear the cache of the data source. After the cache has been cleared, user can use the RebindDataSource method to rebind the data source.

protected void Button2_Click(object sender, EventArgs e)
{
    WebGrid1.ClearCachedDataSource();
    WebGrid1.RebindDataSource();
}

A simple sample of WebGrid’s page was created based on the description of your scenario. WebGrid1 has “DropDownList” EditType on the “Category” column. A WebDialogBox, WebDialogBox1, containing another WebGrid, WebGrid2, is used so that user can add values to the Category list. After user add a new “Category”, click the “Refresh” button to invoke the ClearCachedDataSource and RebindDataSource method.

Please have the attached sample tested on your end and let us hear your feedback.

Hope this helps.