Monier-Williams was the son of Colonel Monier Williams, surveyor-general in the Bombay presidency, and was born in Bombay on 12 November 1819. He was educated at University College, Oxford from 1837 and taught Asian languages at the East India Company College from 1844 until 1858, when company rule in India ended after the mutiny.
Monier-Williams was the second occupant of the Boden Chair of Sanskrit at Oxford University, following Horace Hayman Wilson, who had started the University's collection of Sanskrit manuscripts upon taking the Chair in 1831. Indian studies in England were dominated by the demands of government and Christian evangelism, in ways that might be considered unacceptable in an academic environment today. Indeed, Max Müller, the most obvious candidate for the chair, was passed over because his religious views were deemed too liberal. Monier-Williams declared from the outset that the conversion of India to the Christian religion should be one of the aims of orientalist scholarship.
When Monier-Williams founded the University's Indian Institute in 1883, it provided both an academic focus and also a training ground for the Indian Civil Service. The Institute closed on Indian independence in 1947.
Monier-Williams created a Sanskrit-English dictionary that is still in print. It is also now available on CD-ROM and as the basis of the Cologne Digital Sanskrit Lexicon. He was knighted in 1886, and was made KCIE in 1889, when he adopted his Christian name of Monier as an additional surname. He died at Cannes on 11 April 1899.