Alternate wetting and drying irrigation (AWD) significantly influences the cooking and eating quality of rice (Oryza sativa L.). However, the mechanisms by which AWD affects rice cooking and eating quality remain unclear. Lipid and free fatty acid contents in grains correlate positively with cooking and eating quality of rice. This study examined Yangdao 6 (YD6, a conventional taste indica inbred) and Nanjing 9108 (NJ9108, a superior taste japonica inbred) cultivated under conventional irrigation (CI), alternate wetting and moderate drying irrigation (AWMD), and alternate wetting and severe drying irrigation (AWSD) from 10 days after transplanting to maturity. The research investigated the relationship between lipid and free fatty acid biosynthesis in grains and the cooking and eating quality of rice. Compared to CI treatment, AWMD significantly enhanced the contents of lipid, total free fatty acids (TFFAs), free unsaturated fatty acids (FUFAs), linoleic acid, and oleic acid in milled rice by increasing activities of enzymes associated with lipid synthesis, while AWSD produced opposite effects. Correlation analysis revealed that elevated levels of lipid, TFFAs, FUFAs, linoleic acid, and oleic acid contribute to improved rice cooking and eating quality. The findings demonstrate that AWMD enhances cooking and eating quality of milled rice through optimization of lipid and fatty acid synthesis in rice grains.