Although the establishment of grazing exclosures is often considered an important strategy of reducing soil degradation, their effect on hydrological functions is still poorly understood, particularly in dry‐hot savanna systems with heavy livestock grazing. In addition, the different roles played by the herb roots and the niche differentiation of woody plant roots induced by the grazing and exclosure in soil hydrological functions are still unclear. This study aimed to evaluate the effect of exclosure management on hydrological functions and services and assess the role of different functional vegetation types in improving these functions and services. The experiments were conducted in the continuous grazing areas and exclosure areas in a savanna ecosystem in Yuanjiang, southwest China. The root biomass of herb and woody plants, soil physical properties, water infiltration, and preferential water flow were measured in each study site. The results showed a significant improvement in soil physical properties with more termite holes, lower soil bulk density, and higher total and non‐capillary soil porosity in exclosure areas compared with grazing ones. As a result, the initial and average water infiltration, and preferential flow significantly increased by 132.76%, 185.31%, and 30.29%, respectively, in exclosure areas compared with the grazing ones. The results also showed that the exclosure significantly improved the soil surface water content by increasing the root biomass of herb and woody plants in the shallow soil layers. Herb plants probably improved water infiltration and insulated evaporation, while woody plants improved lateral preferential water flow paths and accelerated the water exchange between vertical and horizontal soil layers, thereby improving the water availability for different plants. This study demonstrated that the exclosure‐induced restoration and niche differentiation of herb and woody plants, coupled with improved soil structure in exclosures, could promote hydrological function and services and improve water management in savanna systems. Therefore, the grazing exclosures could be expanded periodically and cautiously to prevent soil degradation in the present savanna systems.