The dynamics of nanoparticle formation in water-in-oil microemulsions via temporal size evolution has been followed from UV-visible absorption spectra of CdS nanoparticles. Existing Monte Carlo (MC) simulations of nanoparticle formation are primarily based on the mechanism of nuclei formation and their growth by coalescence- exchange of drops, which alone do not predict particles of large size as observed in some experiments. Hence, we have included an additional size enlargement process, namely coagulation of nanoparticles during drop coalescence. We find that particle coagulation, constrained by microemulsion drop size, shows very good agreement with our experimental data on CdS nanoparticle size evolution, for different drop sizes. Thus a combined approach of spectroscopy and MC simulation is helpful in elucidating the mechanism of nanoparticle formation in these confined systems, leading to prediction of size-controlled nanoparticle synthesis.