In this study, a novel bandpass filter (BPF)-based control strategy is proposed for operating an isolated microgrid (MG) formed by a solar photovoltaic (PV) array and permanent magnet synchronous generator-based small hydro system. Due to intermittencies in the PV array and loads, a battery energy storage (BES) is used to maintain power balancing between load and source. The BES is input to bidirectional converter (BDC), whose output is connected to voltage source converter of DC link and it regulates the voltage of DC link. The charging and discharging currents of the battery are also controlled by BDC. The maximum power is extracted from the PV array using modified incremental conductance-based MPPT control, which is made to operate in derating mode when BES is overcharged. The VSC is used to control the load fluctuations by implementing voltage and frequency control schemes. The BPF-based control technique is used to mitigate harmonics, to provide reactive power compensation and load balancing during unbalanced non-linear loading conditions. It also has the capability of removing DC offset, higher order and lower order harmonics from input load currents, effectively. The performance of this MG is validated on an experimental prototype developed in the laboratory.