In a hybrid microgrid with AC and DC subgrids, the interlinking converter (IC) is the key element connecting the two subgrids. The performance of the interlinking converter is adversely affected by the d- and q-axis impedance interaction between the inner control loops. This interaction is highly undesirable since it adversely affects both the dynamic and the steady-state performance of the IC. Based on this, a novel feedback-based decoupling strategy is developed to overcome the cross-coupling effect in the mathematical model of the interlinking converter. This is a novel concept since the feed-forward compensation techniques are utilized to address the cross-coupling effect in prior related works, which has an inherent disadvantage of additional disturbance due to the addition of the compensating terms. In this study, a complete decoupling of the d and q axes was achieved, and the first-order transfer functions were obtained for the control loops using systematic block-reduction algebra and direct synthesis approaches. With this model, computational complexities are reduced and the inner control loops are free from impedance interaction effects, thereby achieving enhanced transient stability. Perfect decoupling of the voltage vectors is achieved by the matrix diagonalization method. Furthermore, the novelty of the proposed control is that the decoupled model is integrated with a normalization-based coordinate control strategy for effective bidirectional power transfer via the interlinking converter. Additionally, the proposed controller’s validity was tested for its performance under different transients in the MATLAB Simulink platform. The simulation results validated the proposed control strategy by showing that a faster response is ensured. A high-quality reference signal is generated due to the effective decoupling achieved. This observation was also validated by comparing the T.H.D. levels of a decoupled model’s reference power signal to one without a decoupling strategy.