Heat 1 tbsp oil in a pan, add one bay leaf to it. Now add the blended paste to it and add Kashmiri red chili powder. Mix everything well and cover it with a lid on medium-low heat for about 7-8 minutes till it thickens.
In a small bowl, add yogurt/dahi, red chili powder, turmeric powder and mix well.
Add the yogurt mixture to the thickened paste. Add 2 tbsp of water and cook it till oil separates from the paste on a low flame for about 5 minutes.
Now, add 1 ¼ cup water and let it cook for 2 minutes. Add ginger powder, crushed kasoori methi, and sugar. Mix well.
Add baby potatoes in the gravy and mix well. Let the potatoes cook on a low flame, cover them with the lid for about 5-7 minutes. This is because the potatoes can absorb some spices and flavors from the gravy.
Switch off the flame. Garnish with some coriander leaves and serve.