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Peanut (Arachis hypogaea L.) is a rainfed crop grown in both tropical and subtropical agro-climatic regions of the world where drought causes around 20% yield losses per year. In the United States, annual losses caused by drought are around $50 million. The objective of this research was to (1) identify genetic variation for the normalized difference vegetation index (NDVI), canopy temperature depression (CTD), relative chlorophyll content by SPAD reading (SCMR), CO2 assimilation rate, and wilting among recombinant inbred lines (RILs) derived from two diverse parents N08086olJCT and ICGV 86015, to (2) determine if the physiological traits can be used for expediting selection for drought tolerance, and (3) experimental validation to identify lines with improved yield under water-limited conditions. Initially, 337 lines were phenotyped under rainfed production and a selected subset of 52 RILs were tested under rainout shelters, where drought was imposed for eight weeks during the midseason (July and August). We found that under induced drought, pod yield was negatively correlated with wilting and CTD, i.e., cooler canopy and high yield correlated positively with the NDVI and SPAD. These traits could be used to select genotypes with high yields under drought stress. RILs #73, #56, #60, and #31 performed better in terms of yield under both irrigated and drought conditions compared to check varieties Bailey, a popular high-yielding commercial cultivar, and GP-NC WS 17, a drought-tolerant germplasm.