Soak Kashmiri red chillies in hot water for 10 minutes, then blend into a smooth paste with shallots, garlic, ginger, galangal, and lemongrass.
Heat oil in a heavy pan and sauté cloves, cardamom, cinnamon, and star anise until fragrant.
Add the spice paste and cook on low heat until the oil separates and the paste darkens.
Add chicken and bruised lemongrass; coat well with the spice mixture.
Pour in coconut milk, water, kaffir lime leaves, grated coconut, sugar, and salt.
Cook uncovered on low heat, stirring occasionally, until the chicken is tender and the sauce thickens.
Let it simmer until the oil rises to the top and the color deepens.
Serve hot with steamed Basmati Rice and Cucumber Salad on the side.