This study investigates the impact of drought on physiochemical properties of a new microalgal strain, isolated and identified as Desmodesmus subspicatus, and consequent lipid production. In vitro drought stress was simulated by adding polyethylene glycol 6000 (PEG6000) (0.5%, 1%, 1.5%, 2%, and 2.5%) to the Bold’s Basal Medium. The application of stress resulted in a significant reduction in the levels of chlorophyll content and an increased carotenoid and anthocyanin pigments while the cellular and extracellular proteins increased in a dose-dependent manner with PEG6000. Drought triggered oxidative stress and enhanced lipid peroxidation depicted by the oxidative stress marker, malondialdehyde (MDA), improved activities of superoxide dismutase (SOD), peroxidase (POD), and non-enzymatic antioxidant proline. Furthermore, lipid content increased markedly under drought stress with optimum increase (252 mg/ml) at 2% PEG, suggesting a correlation between drought-induced oxidative stress and lipid production. The FTIR analysis revealed enhanced levels of alcohol moieties and a consequent decrease in unsaturated lipids; the earlier content also complemented a raised alcohol dehydrogenase (ADH) activity. Thus, these results suggest that oxidative stress signatures impact lipid production under drought stress in the studied microalgae. Understanding this relationship provides insights into the microalgal lipid production for future efficient biofuel prospects. Understanding this relationship provides insights into the potential of a new microalgal strain for future efficient biofuel prospects.