Wheat growth and productivity are unfavorably pretentious by a lack of sufficient water (drought or water deficit) worldwide. Drought stress significantly affects all the morpho-physiological and biochemical characteristics and the agronomical yield of wheat. Different management approaches have been adopted to cope with the negative effects of water deficit. Soil-applied vermicompost is helpful in improving the growth and developmental processes of wheat under water deficit conditions. Therefore, a trial was carried out to optimize the best amount of vermicompost and to assess its role in ameliorating the negative effects of drought for sustainable crop production. The treatments consisted of 1) two contrasting wheat cultivars Faisalabad-08 (drought-tolerant) and Galaxy-13 (drought-sensitive), 2) drought with three levels [D0 = 70% of field capacity (no drought), D1 = 45% of field capacity (mild drought), and D2 = 30% of field capacity (severe drought)] and 3) cellulolytic microbe-enriched vermicompost prepared from rice straw with four levels (VT0 = Control, VT1 = 4 t ha−1, VT2 = 6 t ha−1 , and VT3 = 8 t ha−1). Data on various morphological, physiological, and biochemical parameters were recorded from sowing to crop harvesting. In this study, it was demonstrated that all these parameters were negatively affected by moisture deficit conditions. The application of vermi-fertilizer significantly increased (p < 0.05) the aforementioned parameters of wheat in both the absence and presence of drought. Under severe drought, VT2 treatment increased the seedling length by 14.02–26.14%, fresh weight by 15.16–22.91%, and dry weight by 0.37–28.20% in both cultivars compared with control. In addition, VT2 treatment reduced the leaf water potential by 6.36 and 3.36%, leaf osmotic potential by 1.74 and 1.68%, and increased the turgor potential by 4.83 and 3.36%, and photosynthetic rate by 18.59 and 26.42% in Faislabad-08 and Galaxy-13, respectively, over control. We concluded that the application of vermicompost is a valuable approach to alleviate the adverse impacts of water stress on wheat.