Cotton is an important source of natural fibre used in the textile industry and the productivity of the crop is adversely affected by drought stress. High throughput transcriptomic analyses were used to identify genes involved in fibre development. However, not much information is available on cotton genome response in developing fibres under drought stress. In the present study a genome wide transcriptome analysis was carried out to identify differentially expressed genes at various stages of fibre growth under drought stress. Our study identified a number of genes differentially expressed during fibre elongation as compared to other stages. High level up-regulation of genes encoding for enzymes involved in pectin modification and cytoskeleton proteins was observed at fibre initiation stage. While a large number of genes encoding transcription factors (AP2-EREBP, WRKY, NAC and C2H2), osmoprotectants, ion transporters and heat shock proteins and pathways involved in hormone (ABA, ethylene and JA) biosynthesis and signal transduction were up-regulated and genes involved in phenylpropanoid and flavonoid biosynthesis, pentose and glucuronate interconversions and starch and sucrose metabolism pathways were down-regulated during fibre elongation. This study showed that drought has relatively less impact on fibre initiation but has profound effect on fibre elongation by down-regulating important genes involved in cell wall loosening and expansion process. The comprehensive transcriptome analysis under drought stress has provided valuable information on differentially expressed genes and pathways during fibre development that will be useful in developing drought tolerant cotton cultivars without compromising fibre quality.