Utilizing the <i>in-situ</i> monitoring scheme, we obtained the relationship between diffraction efficiency and etching time under different ion beam conditions. Since the distribution of photoresist is found to be changing innegligible during etching and causes difficulties in determining the end-point, it becomes necessary to consider the photoresist effect on the diffraction efficiency. Taking into account the influence of the etch ratio of photoresist to hafnia, we simulated the efficiencies of the reflected -1st-order diffraction (-1st-order Littrow mount, λ=1064nm, TE polarization) as functions of etched depth. Though the midway evolution of the grating profile is complicated, the main features of the simulated curves agree very well with those of the experimental monitoring curves. With this knowledge, by <i>in-situ</i> monitoring the diffraction intensity, we can obtain good estimates of the etched depth and the erosion progress of the photoresist mask, which are of great help to determine the etching end-point and suitable working parameters of the etcher, and so as to achieve much better cost-efficiency. Employing the proposed <i>in-situ</i> monitoring scheme, multilayer dielectric gratings with retroreflected efficiency approaching 100% were fabricated.