[Thought]

It works like this:

Graal replaces the first 7 indices in the body palette with their respective cloth color settings, any colors after those in the palette are free game and can be used for anything.

You can safely increase the palette size to 256 colors without any problem.

Palette Indices (Default):
0 - Black (0, 0, 0) - Border color
1 - Belt, (0,0,255) - Belt color
2 - Dark Green, (0,132,0) - Transparent color (use this index for transparency)
3 - Dark/Blood Red (206,24,41) - Shoes
4 - Red (255,0,0) - Sleeves
5 - Orange (255,173,107) - Skin
6 - White (255,255,255) - Coat
7+ - Free game, use for any colors you want.