New folders are created in root instead of currently selected folder
Solution 1:
You can't. Finder creates new folders in the folder currently being displayed, not the folder you've highlighted. First you have to display the folder you want the new one in - double click it, then create the new one.
Solution 2:
Open the folder you want to create the new folder in first (double-click). Then choose File->New Folder or Shift-Cmd-N.