Wellbore instability driven by reactive clay swelling remains a critical and costly challenge in the application of water-based drilling fluids. The core objective of this study is to evaluate the fundamental clay hydration inhibition potential of CeO2–Bi2O3 bimetallic nanocomposite to ensure robust operational stability. The nanomaterial was synthesized via co-precipitation, subjected to 1-hour ultrasonic homogenization and 1-week static aging, and subsequently evaluated using dynamic light scattering, zeta potential, static filtration (100 psi, 60 °C), and hot rolling tests (105 °C). Experimental results demonstrated that an optimal nanocomposite concentration of 500 ppm fundamentally arrests clay hydration via double-layer compression (− 38.7 mV) and pore plugging, yielding an exceptional dynamic shale cutting recovery of 93%, significantly outperforming the standard 3 wt% KCl benchmark (78%). System compatibility assessments proved the additive acts as a non-damaging agent, maintaining vital plastic viscosity and yield point parameters while improving API filtration control in polymeric (9.5 to 7.8 mL) and weighted mud systems. In conclusion, the CeO2–Bi2O3 nanocomposite serves as a highly efficient chemical inhibitor that mechanically stabilizes wellbores and prevents fluid invasion, presenting a viable, non-damaging alternative for advanced drilling fluid formulations.