The use of the term root file system has a different meaning in regard to GRUB. It is important to remember that GRUB's root file system has nothing to do with the Linux root file system.
The GRUB root file system is the top level of the specified device. For example, the image file
(hd0,0)/grub/splash.xpm.gz is located within the
/grub/ directory at the top-level (or root) of the
(hd0,0) partition (which is actually the
/boot/ partition for the system).
kernel command is executed with the location of the kernel file as an option. Once the Linux kernel boots, it sets up the root file system that Linux users are familiar with. The original GRUB root file system and its mounts are forgotten; they only existed to boot the kernel file.