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Plant growth promoting rhizobacteria (PGPR) as microbial biostimulant promotes growth and productivity of crops under drought. However, their commercial utility is constrained by their instability and low viability in field trials. Immobilization or encapsulation of PGPR biostimulant aims to provide physical protection from stressful environment and ensure a high rate of rhizospheric colonization. In this work, we immobilized Acinetobacter calcoaceticus AC01 in 2% alginate by ionic gelation process, and evaluated for in vitro and in vivo studies. The rhizobacteria was characterized for osmotic stress, indole, phosphate solubilization, siderophore, gibberellic acid, salicylic acid, alginate and Exopolysaccharide (EPS). The encapsulated PGPR AC01 exhibited optimal moisture content of 3.57%, expansion rate of 80.62%, 95% embedding efficiency and diameter of 1.2–1.4 mm. The viability of AC01 in microcapsules remained 107CFU/g during 90 days of storage. The encapsulated PGPR biostimulant were also evaluated in Arachis hypogaea L. for drought mitigation. The inclusion of rhizobacterial microcapsules considerably induced maximum growth with significantly increased plant height, biomass, nodule count, relative water content, membrane stability index and osmolyte accumulation under drought conditions compared to non-encapsulated bacteria. Our results demonstrate that bio-encapsulation of Acinetobacter sp. AC01 in alginate matrix is a potential alternative for alleviating drought and a promising delivery system for agricultural applications. [ABSTRACT FROM AUTHOR]