1. Diversity of plant communities is impacted by multiple global change drivers but also by altered biotic interactions with antagonist and mutualist organisms that can potentially affect species coexistence. 2. With a two-year outdoor mesocosm experiment in realistic mesic grassland communities, we explored the role of insect herbivory in impacting plant community dynamics under contrasting levels of water availability simulating altered rainfall regimes. We selected a grasshopper species (Calliptamus italicus) feeding predominantly on forbs while avoiding grasses. 3. High water availability reduced species coexistence, boosting productivity while decreasing individual plant survival. At the community level, herbivores were not able to promote species coexistence but asymmetrically influenced grasses and forbs, reducing forb biomass under high water availability. 4. Herbivores shaped individual plant responses to both abiotic conditions and individual-neighbours’ interactions. Herbivores influenced focal plant survival by altering the effect of neighbouring plants, mitigating the negative effect of high neighbour biomass at low water availability and exacerbating it at high level of water availability. 5. Synthesis: Altered rainfall has the capacity to change the relative strength of the plant-plant interactions and also to determine the effects of herbivores on grassland communities. The complexity of the interactions between plants and herbivores and the observed context-dependence indicate the need to incorporate multiple biotic and abiotic drivers to fully understand the mechanisms underlying plant dynamics and species coexistence in a changing world.