Wellbore instability due to shale swelling and fluid loss of drilling mud is the main challenge faced by the oil and gas industry. Herein, we successfully demonstrated the positive impact of newly developed single-walled carbon nanotubes/polyvinylpyrrolidone (SWCNTs/PVP) nanocomposites on the drilling efficiency of water-based muds (WBMs). By adopting a standardized sonication technique, we achieved highly dispersed and uniform distribution of single-walled carbon nanotubes (SWCNTs) within the matrix of polyvinylpyrrolidone (PVP). SWCNTs provided the required mechanical strength and hydrophobicity, while PVP acted as a binder, filler, and dispersion medium. The surface morphology of shales was compared before and after modification with SWCNTs/PVP nanocomposites. The moisture adsorption/repellent characteristics of the shales were predicted by Fourier transform infrared (FTIR) spectroscopy. The dispersion stability of synthesized SWCNTs/PVP nanocomposite with bentonite clay in the presence of water was also recorded for 24 h. The drilling mud modified with 5-SWCNTs/PVP nanocomposite demonstrates 23% reduction in fluid loss. The inhibition stability and swelling rate of shales were systematically investigated and compared with water, KCl, unmodified mud, and commercial shale inhibitor. The comparison indicates that the modified drilling mud having 5-SWCNTs/PVP composite showed the highest dispersion recovery (89.5%) and the lowest swelling rate (21.6%). The synthesized nanocomposite not only forms a protective layer on the shale surface to hinder the access of water but also offers structural stability to the drilling mud. Improved swelling inhibition, fluid loss control, and long-term stability of shale against reactive fluid, suggested that the modified WBM can be effectively utilized to control wellbore instability during drilling operations.