Mulberry (Morus spp.) is an important plant used for rearing silkworm (Bombyx mori L.). Its fruit is also used for human consumption with several medicinal properties. Most of the mulberry cultivation in India is under the risk of either intermittent or terminal drought, as 50% of the country’s mulberry acreage falls under arid and semi-arid conditions. Triazole-induced abiotic stress tolerance has been used successfully in many horticultural crops including planted trees. In order to understand the underlying mechanism, the effect of paclobutrazol (PBZ), a triazole, was studied on physiological tolerance in mulberry under water stress, and rainfed conditions. During pot experiment, PBZ improved photosynthetic accumulation of CO2 under water stress conditions, thus improving survival percentage. Different concentrations of PBZ (5, 10, 25, 50, 100, and 500 mg L−1) were applied in field during rainfed conditions. Lower concentration (10–25 mg L−1) of PBZ significantly (p ≤ 0.05) improved leaf biomass by increasing net photosynthetic rates. Increase in the photochemical efficiency of PSII and higher NPQ mediated through xanthophyll cycle was found to be the mechanism for these physiological effects. PBZ also reduced lipid peroxidation by inducing enzymatic antioxidants and redox metabolites. Bioassays do not suggest any negative interactions on silkworm or on downstream processing of silk. This study, therefore, provides mechanism of physiological tolerance and recommends the use of PBZ to mitigate stressful environment in planted trees under water stress and rainfed conditions. Results have been discussed in context of improving commercial silk yield.