Heat 1 teaspoon of oil in a pan on medium heat.
Once the oil is hot, add the bay leaf, cinnamon stick, cloves and saute for few seconds.
Then add the onion, ginger garlic paste, and fry until the onion is translucent.
Add the tomatoes, cashew paste, and green chillis, and mix.
Then add 1 cup of water. Cover the pan and cook on medium heat for 15 minutes. After 15 minutes, remove the pan from heat.
Remove the bay leaf, cinnamon stick, and cloves. Let the mixture cool down a bit and then transfer to a blender.
Grind the masala to a smooth paste and set aside.
To the same pan now add 3 tablespoons butter on medium heat.
Once the butter melts, add the red chilli powder and fry for few seconds. This will give the curry an orange-red color.
Then add the ground paste back into the pan.
Mix well and cook for 1-2 minutes.
Add in the paneer cubes and cook for 2 to 3 minutes on medium heat.
Garnish paneer butter masala with cilantro and serve hot with naan or rice!