The drilling fluid is a thick mix of water and other things. It does two main things:

1. It paints the inside of the borehole wall preventing the drilling fluid leaking but more importantly it stops the walls from collapsing
2. It suspends or floats the cuttings within it. The cuttings are then carried to the surface, the cuttings are carried with it and then left in the soak pit at ground level

It is important to keep the mixture thick for the above reasons. However, by painting the walls of the borehole it will partly block water from entering into the borehole. This will then mean less water is able to be taken from the well when it is finished. It is therefore very important to flush the well properly after finishing the borehole. More information on flushing can be found here.