Pongamia pinnata is a promising biofuel tree species, yet its establishment in drought-prone areas is hindered by poor seedling performance under water stress. This study compared two contrasting genotypes—NRCP9 (tolerant) and NRCP10 (sensitive)—to uncover the physiological and molecular mechanisms of drought tolerance. NRCP9 showed higher peroxidase activity and proline accumulation, while NRCP10 exhibited greater reductions in chlorophyll and water content. Transcriptome analysis revealed over 26,000 differentially expressed genes (DEGs) in NRCP9, including transcription factors related to stress signaling and metabolism. These findings provide insights into Pongamia’s adaptive responses and offer a molecular foundation for breeding drought-resilient biofuel crops.