Alternate wetting and drying irrigation (AWD) plays crucial roles in regulating the cooking and eating quality of rice (Oryza sativa L.). However, it remains unclear about how AWD influences rice cooking and eating quality. Lipid and free fatty acids in grains are positively related with cooking and eating quality of rice. In this study, Yangdao 6 (YD6, a conventional taste indica inbred) and Nanjing 9108 (NJ9108, a superior taste japonica inbred) were planted in the field with conventional irrigation (CI), alternate wetting and moderate drying irrigation (AWMD), and alternate wetting and severe drying irrigation (AWSD) from 10 days after transplanting to maturity. The relationships between the biosynthesis of lipid and free fatty acids in grains and cooking and eating quality of rice were investigated. Compared with CI treatment, the AWMD significantly increased contents of lipid, total free fatty acids (TFFAs), free unsaturated fatty acids (FUFAs), linoleic acid, and oleic acid in milled rice by promoting activities of the enzymes associated with lipid synthesis, while AWSD regime exerted the opposite effect. Correlation analysis showed that higher contents of lipid, TFFAs, FUFAs, linoleic acid, and oleic acid were more beneficial to improvement in rice cooking and eating quality. These results demonstrated that AWMD regime could improve cooking and eating quality of milled rice by optimizing lipid and fatty acid synthesis in rice grains.