The strong stratification of the Bay of Bengal (BoB) causes rapid variations in sea surface temperature (SST) that influence the development of monsoon rainfall systems. This stratification is driven by the salinity difference between the fresh surface waters of the northern bay and the supply of warm, salty water by the Southwest Monsoon Current (SMC). Despite the influence of the SMC on monsoon dynamics, observations of this current during the monsoon are sparse. Using data from high-resolution in situ measurements along an east–west section at 8°N in the southern BoB, we calculate that the northward transport during July 2016 was between 16.7 and 24.5 Sv (1 Sv ≡ 106 m3 s−1), although up to ⅔ of this transport is associated with persistent recirculating eddies, including the Sri Lanka Dome. Comparison with climatology suggests the SMC in early July was close to the average annual maximum strength. The NEMO 1/12° ocean model with data assimilation is found to faithfully represent the variability of the SMC and associated water masses. We show how the variability in SMC strength and position is driven by the complex interplay between local forcing (wind stress curl over the Sri Lanka Dome) and remote forcing (Kelvin and Rossby wave propagation). Thus, various modes of climatic variability will influence SMC strength and location on time scales from weeks to years. Idealized one-dimensional ocean model experiments show that subsurface water masses advected by the SMC significantly alter the evolution of SST and salinity, potentially impacting Indian monsoon rainfall.