So, you have to look at both interest rates as well as demand-supply for forward Dollars. Also, a key factor to keep in mind when analysing the money-forex market linkage is that it is primarily banks which trade both markets. If there had been complete capital account convertibility, the Forward Premium would have equaled the Indo-US Interest rate differential. That is not the case. They cannot however, keep Open Rupee-Dollar Spot positions in exess of a certain amount.
Most banks underutilise their limits.
In short, a linkage does exist. This should be clear. The Spot rate seems to be a function of the changes in the Net Cash-Flow Balances in India's external sector. In the case of the Indian Rupee, money market rates seem to have little influence on the Spot rate. However, it is usually seen, in the case of the global major currencies that a rising interest rate environment in a country leads to the currency of that country strengthening.