Highly degenerate n-type CdO with high electron mobility is a promising transparent conducting oxide (TCO) for optoelectronic devices utilizing a spectrum in the Vis-NIR range. In particular, it has been shown that doped CdO thin films can show much superior transparency of >80% in the NIR region compared to conventional transparent conducting oxide (e.g., Sn-doped In2O3) thin films with a similar sheet resistance. However, CdO thin films typically experience rapid degradation in their electron mobilities when exposed to environmental conditions with H2O moisture. Here, we studied the effects of thermal annealing on the environmental stability of In-doped CdO (CdO:In) using a combination of different analytical techniques. CdO:In thin films with different In concentration (0%–8.3%) synthesized by magnetron sputtering were subjected to different post-thermal annealing (PTA) and then aged in different environmental conditions with varying relative humidity (RH) in the range of 0%–85%. Our results reveal that the degradation of CdO:In thin films can be primarily attributed to the oxygen vacancy-related defects at the grain boundaries, which can readily react with the OH− in the moisture. The moisture induced degradation can be mitigated by appropriate PTA at high temperatures (>400 °C) where grain boundary defects, primarily associated with Cd vacancies, can be passivated through hydrogen (H), thus enhancing their environmental stability. The present study provides a comprehensive understanding of the instability mechanisms and defect passivation in transparent conducting CdO:In thin films, which can also be relevant for other wide gap oxides.