The proper construction of neural circuits requires the generation of diverse cell types, their distribution to defined regions, and their specific and appropriate wiring. A major objective in neurobiology has been to understand the molecular determinants that link neural birth to terminal specification and functional connectivity, a task that is especially daunting in the case of cortical interneurons. Considerable evidence supports the idea that an interplay of intrinsic and environmental signalling is crucial to the sequential steps of interneuron specification, including migration, selection of a settling position, morphogenesis and synaptogenesis. However, when and how these influences merge to support the appropriate terminal differentiation of different classes of interneurons remains uncertain. In this Review, we discuss a wealth of recent findings that have advanced our understanding of the developmental mechanisms that contribute to the diversification of interneurons and suggest areas of particular promise for further investigation.