The application of soil mulching has been widely used to increase crop production; however, few research studies have comprehensively evaluated the use of recycled paper as soil mulch and its effects in relation to water savings and crop coefficients. The objective was to evaluate the effects of mulching with recycled paper on evaporation and evapotranspiration of Physalis peruviana and to determine the crop coefficients in its development stages. The study was carried out in two cultivation cycles at the Lysimetric Station of Viçosa, MG, Brazil. The experiments were set up in a randomized block design with four replicates, where four lysimeter treatments were applied: P. peruviana cultivation without recycled paper mulch (C); P. peruviana cultivation with recycled paper mulch (CP); lysimeter with only recycled paper mulch (P); and lysimeter cultivated with Bahiagrass (G). Irrigation and drainage volumes in each lysimeter were measured daily to calculate crop evapotranspiration (ETc), reference evapotranspiration (ETo) and, therefore, the crop coefficients (Kc). In addition, crop phenology, fruit characteristics, gas exchange, yield and normalized difference vegetation index (NDVI) were also evaluated. For the first cultivation cycle, over 218 days, the values of water consumption in the lysimeters C, CP, P and G were 405, 291, 88 and 444 mm, respectively. For the second cycle, over 206 days, the values of water consumption were 416, 279, 94 and 331 mm, respectively. Recycled paper significantly reduced water consumption, especially in the initial and late-season stages, also reducing Kc values. The Kc values for P. peruviana were 0.25, 0.55, 1.05 and 0.46 in cultivation with mulch and 0.45, 0.85, 1.35 and 0.48 in cultivation without mulch for the initial, development, mid-season and late-season stages, respectively. NDVI can be used to estimate the Kc values of P. peruviana. Recycled paper mulch reduced water consumption by 30.6% and increased gas exchange and yield of P. peruviana in cycles 1 and 2, respectively.