Among the potential factors imparting endogeneity to the money supply process, one is the influx of foreign capital that affects the balance sheet of the central bank. In the presence of significant capital flows into the economy concurrent with the on-going process of financial liberalisation in India, we find that capital flows imparted an endogenous impact on monetary aggregates through the route of variable interest rates in a deregulated interest rate regime. The paper assesses the frameworks used to analyse the impacts of capital flows. Adopting an interest rate reaction function approach, the paper finds that capital flows into the economy have significant monetary impacts.