The six-month old girl was found safe in the Mercedes after it was dumped in Coburg.
CCTV shows the thief outside the school with a female accomplice and at least one other person.
They pull up in a light coloured sedan before the man walks out of view.
Seconds later, the Mercedes can be seen in the video driving off with a woman, a friend of the family, on the bonnet.
A manhunt is now underway for the thief, while police have reunited the baby with his relieved family.
Victoria Police spokesman Thomas O’Byrne said the Mercedes station wagon was stolen from a school at the intersection of Ohea and Ross streets about 3pm.
“A single male offender was seen getting into the vehicle and driving off,” Mr O’Byrne said.
“A six-month-old was in the back of the Mercedes at the time.”
Moreland crime investigation unit detective Senior Constable Virginia Creece said the friend was dragged more than 400m.
“It’s quite a brazen act by this male, because the friend of the victim actually got on the bonnet of the car and attempted to stop the man from leaving,” Sen-Constable Creece said.
Sen-Constable Creece said when the man dumped the car in Brunswick shortly after, he told a witness he had a baby in the car and “didn’t know what to do with it.”
The witness then found the baby and called 000.
The mother of the stolen baby was “hysterical” at the time, and an ambulance had to be called to attend to her.
Neighbour Nikki, who lives across from the school, said she initially thought it was a “joke” or a domestic incident.
“I was standing right in front of my house because I was getting ready to pick my kids up from school,” Nikki said.
“As first I thought it was a joke, or a custody battle over a baby, or something.
“Then I saw the man just casually get in the car.”
Nikki said she saw the mother banging on the car’s windows and screaming trying to get in.
“Her friend jumped on the bonnet, and even tradies working at the bottle shop at the corner tried to stop him with his car,” Nikki said.
“I never thought I would ever see something like that happen. Never, ever.
“It’s so scary.”
Coburg resident Sarah Czajka, who lives near where the car was dumped, said the car was stopped in a laneway coming from Haig Ave.
There was “commotion” as police descended on the street, Ms Czajka said, but the scene became more calm as the girl was soothed by a family member.
“The baby looked perfectly fine, but they did have an ambulance on scene,” she said.
“It was a happy little baby.”
The male thief is described as in his 30s and of European appearance with dark wavy hair. He was wearing a light-coloured too and dark pants at the time.
Anyone with any other information is urged to contact Crime Stoppers on 1800 333 000 or to submit confidential report at crimestoppersvic.com.au