Climate change and habitat fragmentation threaten biodiversity, but their interactive effects remain poorly understood. In closed-canopy forests, altered rainfall patterns may induce drought conditions that are exacerbated at forest edges due to warmer, drier microclimates. Plant responses to water limitation can be mediated by functional traits related to resource acquisition and stress tolerance. We examined how reduced soil moisture and edge conditions jointly affect seedling survival, and whether species’ responses are explained by their traits. In a human-modified forest in the central Western Ghats, India, we transplanted ~ 1-year-old seedlings in a factorial combination of habitat (forest edge vs. interior) and moisture deficit (throughfall exclusion vs. control). We monitored survival through one year and estimated moisture response (survival in throughfall exclusion vs. control) and tested its relationship with six traits. Throughfall exclusion reduced soil moisture more at edges, particularly during dry months. At the edge, three species showed significantly lower survival under drought, whereas survival in the interior did not differ with water treatment. Acquisitive traits (low stem specific density, low leaf dry matter content, and low leaf mass per area) improved survival with reduced moisture at edges. Trait-mediated responses were not evident in the interior, likely due to buffered microclimates. Multi-trait combinations were better predictors of moisture response than individual traits, indicating trait coordination. Our results suggest that drier conditions may favour acquisitive species at forest edges, which has implications for community composition, management and restoration of fragmented forests in a changing climate.