Microfabricated Lamellar grating interferometers (LGI) require fewer components compared to Michelson interferotemeters and offer compact and broadband Fourier transform spectrometers (FTS) with good spectral resolution, high speed and high efficiency. This study presents the fundamental equations that govern the performance and limitations of LGI based FTS systems. Simulations and experiments were conducted to demonstrate and explain the periodic nature of the interferogram envelope due to Talbot image formation. Simulations reveal that the grating period should be chosen large enough to avoid Talbot phase reversal at the expense of mixing of the diffraction orders at the detector. Optimal LGI grating period selection depends on a number of system parameters and requires compromises in spectral resolution and signal-to-bias ratio (SBR) of the interferogram within the spectral range of interest. New analytical equations are derived for spectral resolution and SBR of LGI based FTS systems.