The exact date of Hyder Ali's birth is not known with certainty. Various historical sources provide dates ranging between 1717 and 1722 for his birth. There are also some variations in reports of his ancestry. According to some accounts, his grandfather was descended from a line of Sayyids tracing their lineage back to Persia, while another traces his lineage instead to the area of present-day Afghanistan. In a third account, written by one of his French military officers, Hyder himself claimed descent from the Bani Hashim Clan of Quraysh tribe of Arabs, the tribe of Muhammad through his ancestor Sayyid walSharif Hassan bin Yahya who was the Sherif of Makkah. His father, Fath Muhammad, was born in Kolar, and served as a commander of 50 men in the bamboo rocket artillery (mainly used for signalling) in the army of the Nawab of Carnatic. Fath Muhammad eventually entered the Service of the Wodeyar Rajas of the Kingdom of Mysore, where he rose to become a powerful military commander. The Wodeyars awarded him Budikote as a jagir (land grant), where he then served as Naik (Lord). Hyder Ali was born in Budikote; he was Fath Muhammad's fifth child, and the second by his third wife. His early years are not well documented; he entered military Service along with his brother Shahbaz after their father died in combat. After serving for a number of years under the rulers of Arcot, they came to Seringapatam, where Hyder's uncle served. He introduced them to Devaraja, the dalwai (chief minister, military leader, and virtual ruler) of Krishnaraja Wodeyar II, and his brother Nanjaraja, who also held important ministerial posts. Hyder and his brother were both given commands in the Mysorean army; Hyder served under Shahbaz, commanding 100 cavalry and 2,000 infantry.

In 1748, Qamar-ud-din Khan, Asaf Jah I, the longtime Nizam of Hyderabad, died. The struggle to succeed him is known as the Second Carnatic War, and pitted Asaf Jah's son Nasir Jung against a cousin, Muzaffar Jung. Both sides were supported by other local Leaders, and French and British forces were also involved. Devaraja had started vesting more military authority in his brother, and in 1749 Nanjaraja marched the Mysorean army in support of Nasir Jung. The army went to Devanhalli, where the Mysoreans participated in the Siege of Devanahalli Fort. The fort was held by Muzaffar Jung's forces and the siege was conducted by the Marquis de Bussy. During the successful eight-month siege, the Naik brothers distinguished themselves, and were rewarded by the dalwai with enlarged commands. By 1755 Hyder Ali commanded 3,000 infantry and 1,500 cavalry, and was reported to be enriching himself on campaigns by plunder. In that year he was also appointed Faujdar (military commander) of Dindigul. In this position he first retained French advisers to organise and train his artillery companies. He is also known to have personally served alongside de Bussy, and is believed to have met both Muzaffar Jung and Chanda Shahib. In these early wars he also came to dislike and mistrust Muhammed Ali Khan Wallajah, the Nawab of the Carnatic. In fact Muhammed Ali Khan Wallajah and the Mysorean Leaders were long at odds with each other, seeking territorial gains at the other's expense. Muhammad Ali Khan Wallajah had by then formed an alliance with the British, and he was accused by Hyder Ali in later years of effectively preventing him from making any sort of long-lasting alliances or agreements with the British. Throughout the Carnatic Wars, Hyder Ali and his Mysore battalions served alongside French commanders such as Joseph Francois Dupleix, Count de Lally and de Bussy, he also assisted Chanda Sahib on various occasions. Hyder Ali supported the claims of Muzaffar Jung and later sided with Salabat Jung.

In 1757 Hyder Ali was called to Seringapatam to support Devaraja against threats from Hyderabad and the Marathas. Upon his arrival he found the Mysorean army in disarray and near mutiny over pay. While Devaraja bought his way out of the threats to Seringapatam, Hyder Ali arranged for the army to be paid and arrested the ringleaders of the mutiny. Hyder Ali then led the Mysorean campaigns against the Nairs of Malabar (the west coast of India). For his role in these activities Hyder Ali was rewarded by Devaraja with the jaghir (regional governorship) of Bangalore. In 1758 Hyder Ali successfully forced the Marathas to lift a siege of Bangalore. By 1759 Hyder Ali was in command of the entire Mysorean army. The young raja Krishnaraja rewarded Hyder Ali's performance by granting him the title Fath Hyder Bahadur or Nawab Hyder Ali Khan. Because of the ongoing conflicts with the Marathas the Mysorean treasury was virtually bankrupted, prompting the queen mother to force into exile Nanjaraj, who had assumed the position of dalwai upon his brother's death in 1758. Hyder Ali was a beneficiary of this action, rising in influence in the court.

In 1760 the queen mother conspired with Khande Rao, who had gone into the raja's Service, to oust Hyder Ali. He was precipitously forced out of Seringapatam, leaving his family, including his son Tipu Sultan, under house arrest. The sudden departure left Hyder Ali with few resources. He may have been fortuitously aided at this time by the faraway Third Battle of Panipat, in which the Marathas suffered a major defeat, Jan 1761. Because of this loss, the Marathas withdrew forces from Mysore and Hyder Ali's brother-in-law Makdum Ali chased them into Bidnur and Sunda. Hyder Ali soon consolidated his strength by placing Mirza Sahib as the commander of Sira, Ibrahim Ali Khan in Bangalore and Amin Sahib his cousin in Basnagar. Soon afterward Hyder Ali marched alongside Makdum Ali's forces, which numbered about 6,000, along with the 3,000 men from his garrison at Bangalore, toward Seringapatam.

In 1763, Hyder Ali and Tipu Sultan established their first Navy fleet on the Malabar Coast, under the command of Ali Raja Kunhi Amsa II a large and well armed fleet consisting of 10 dhows and 30 larger ketches in the Indian Ocean, in his attempts to conquer islands that had withstood the Mughal Emperor Aurangzeb. In 1763 his fleet sailed from Lakshadweep and Cannanore carrying on board sepoys and on its pennons the colours and emblems of Hyder Ali, and captured the Maldives.

Mysore's titular ruler Krishnaraja died in April 1766, while Hyder was in Malabar. Hyder had left orders that Krishnaraja's son Nanjaraja Wodeyar be invested should that happen, and he only later came to formally pay his respects to the new rajah. He took advantage of this opportunity to engage in a sort of house cleaning: the raja's palace was plundered, and its staff reduced to the point where virtually everyone employed there was also a spy for Hyder Ali.

In 1766 Mysore began to become drawn into territorial and diplomatic disputes between the Nizam of Hyderabad and the British East India Company, which had by then become the dominant European colonial power on the Indian east coast. The Nizam, seeking to deflect the British from their attempts to gain control of the Northern Circars, made overtures to Hyder Ali to launch an invasion of the Carnatic. Company representatives also appealed to Hyder Ali, but he rebuffed them. The Nizam then ostensibly struck a deal with the British Madras Presidency for their support, but apparently did so with the expectation that when Hyder Ali was prepared for war, the deal with the British would be broken. This diplomatic maneouvring resulted in the start of the First Anglo-Mysore War in August 1767 when a company outpost at Changama was attacked by a combined Mysore-Hyderabad army under Hyder Ali's command. Despite significantly outnumbering the British force (British estimates place the allied army size at 70,000 to the British 7,000), the allies were repulsed with heavy losses. Hyder Ali moved on to capture Kaveripattinam after two days of siege, while the British commander at Changama, Colonel Joseph Smith, eventually retreated to Tiruvannamalai for supplies and reinforcements. There Hyder Ali was decisively repulsed on 26 September 1767. With the onset of the monsoon season, Hyder Ali opted to continue campaigning rather than adopting the usual practice of suspending operations because of the difficult conditions the weather created for armies. After over-running a few lesser outposts, he besieged Ambur in November 1767, forcing the British to resume campaigning. The British garrison commander refused large bribes offered by Hyder Ali in exchange for surrender, and the arrival of a relief column in early December forced Hyder Ali to lift the siege. He retreated northward, covering the movements of the Nizam's forces, but was disheartened when an entire corps of European cavalry deserted to the British. The failures of this campaign, combined with successful British advances in the Northern Circars and secret negotiations between the British and the Nizam Asaf Jah II, led to a split between Hyder Ali and the Nizam. The latter withdrew back to Hyderabad and eventually negotiated a new treaty with the British company in 1768. Hyder Ali, apparently seeking an end to the conflict, made peace overtures to the British, but was rebuffed.

In 1768, Hyder Ali lost 2 garbs and 10 gavilats to the British East India Company's naval attack. He was left with 8 garbs and 10 galivats, most of them damaged beyond repair.

This show of force compelled the Company to negotiate further. Hyder Ali, who was seeking diplomatic leverage against the Marathas, wanted an alliance of mutual defence and offence. The Company refused to accede to an offensive military treaty; the treaty signed at Madras on 29 March 1769, restored the status quo ante bellum, except for Mysore's acquisition of Karur, and also included language that each side would help the other defend its territory. In summarising Hyder Ali's conduct of the war, biographer Lewin Bowring notes that he "evinced high qualities as a tactician and the sagacity of a born diplomatist."

During the lengthy conflict with the Marathas, Hyder had several times requested the assistance of the British East India Company, and it had each time been refused, in part due to the influence at Madras, of Hyder's enemy, the Nawab of Arcot. The British had also angered the Marathas by repudiating treaties, with whom they were at war for much of the 1770s, and they had also upset the Nizam of Hyderabad Asaf Jah II over their occupation of Guntur.

In 1771, Maratha envoys had approached Hyder with a proposal to unite against the British, with the goal of wresting control of eastern India from their influence. Since Hyder was at the time still attempting alliance with the British, he informed them of this offer, noting that he thought the Marathas would gain too much power and even threaten his own position under those circumstances. The Marathas, still at war with the British, renewed an offer of alliance in 1779. In this case, the alliance was to include the Nizam. His decision to join this alliance was prompted by two British actions. The first was the British capture by capitulation of the west-coast port of Mahé, part of a concerted effort by the British to take all French out-posts following the 1778 French entry into the American Revolutionary War. Hyder received much of his French-supplied equipment through this French-controlled port, and had provided troops for its defence. Furthermore, the British action had provoked the Nairs on the Malabar coast to rise in rebellion again, although Hyder had quickly put this down. The second offence was the movement of British troops through territory under his control (and also other territory controlled by the Nizam) from Madras to Guntur. There was a skirmish in the hills, and the British detachment ended up retreating to Madras.

The peace with the Marathas was short-lived. The Peshwa Madhavrao I died late in 1772, beginning a struggle for his succession. In 1773, Hyder used this opportunity to send Tipu with an army to recover territories lost to the Marathas to the north, while he descended into Coorg, which provided a more secure route to the Malabar territories he wanted to recover from the Marathas. A claimant to the Coorg throne had asked for Hyder's assistance in 1770 when he was pre-occupied with the Marathas. He quickly captured Coorg's capital, Merkara, imprisoning Raja Vira Rajendra. He installed a Brahmin as Governor to collect revenues before continuing to Malabar, where by the end of 1774 he had recovered all his lost territory. The Coorgs rose in rebellion against his Governor, upon which Hyder returned to Coorg, crushed the rebellion, and hanged most of the ring-leaders. This did not stop the restive Coorgs from becoming a continuing Problem for Hyder, and for, Tipu after his death.

On 19 February 1775, two of Hyder Ali's ketches attacked the HMS Seahorse, which drove them off after a brief exchange of fire.

In 1776 the young Raja Chamaraja Wodeyar VIII died. To choose a successor, Hyder had all of the children of the royal family brought together, and watched them play. A child, also named Chamaraja Wodeyar IX, chose to play with a jewelled dagger, and was supposedly selected on that basis as the new Raja of Mysore.,

Hyder Ali began rebuilding his navy in 1778. Employing Joze Azelars, a Dutchman, he had built eight ketches with masts and 40 cannons and eight smaller dhows. When the war broke out in 1779, Azelars noted that the Brahmans and their allies made every possible effort to halt progress of the newly rebuilt navy based at Bhatkal.

Details are sketchy on Hyder's personal life. He had at least two wives. His second wife was Fakhr-un-nissa, the mother of Tipu, his brother Karim, and a daughter. He may have also married the sister of Abdul Hakim Khan, the Nawab of Savanur; Bowring describes it as a marriage, but Punganuri Rao's translator, citing Wilks, claims this was a "concubine marriage". Karim and the daughter were both married to Abdul Hakim's children to cement an alliance in 1779.

In Hyder's time the Mysorean army had a rocket corps of as many as 1,200 men, which Tipu increased to 5,000. At the 1780 Battle of Pollilur, during the second war, Colonel william Baillie's ammunition stores are thought to have been detonated by a hit from one of Hyder's rockets, contributing to the British defeat.

Lord Macartney, who had recently arrived to take the Governorship of Madras, also brought news that Britain was at war with the Dutch. Consequent to this, the Company was instructed to seize Dutch holdings in India, and Macartney had ordered a detachment from Tanjore, under Colonel Braithwaite, to capture the main Dutch post at Negapatam. Hyder made an agreement with the Dutch to provide troops for its defence, but was himself forced away from Negapatam by Braithwaite. The British took Negapatam after three weeks of siege in October and November 1781. This setback forced Hyder to withdraw from most of Tanjore.

Hyder Ali was buried at the Gumbaz in Seringapatam, the mausoleum raised by his son Tipu Sultan in 1782–84.

By the time of his son Tipu Sultan's reign, Mysore had some of the world's highest real wages and living standards in the late 18th century, higher than Britain, which in turn had the highest living standards in Europe. Mysore's average per-capita income was five times higher than subsistence level, i.e. five times higher than $400 (1990 international dollars), or $2,000 per capita. In comparison, the highest national per-capita incomes in 1820 were $1,838 for the Netherlands and $1,706 for Britain.

Hyder Ali was an innovator in the military use of rockets, which were used against positions and territories held by the British East India Company during the Anglo-Mysore Wars. Although rocket Technology originated in China and had made its way to India and Europe by the 13th century, development of accurate cannons had sidelined rockets as a military Technology in Europe. Rocket Technology was already in use when Hyder's father served (he commanded a company of 50 rocketmen), but it was Hyder who improved them and significantly expanded their use in the military. Technological innovations included the use of high-quality iron casing (better than was then available in Europe) for the combustion chamber, enabling the use of higher-powered explosive charges. He also organised companies of rocketmen who were experienced in aiming rockets based on the size of the rocket and the distance to the target. Rockets could also be mounted on carts that improved their mobility and made possible the firing of large numbers of them all at once. Rockets developed by Hyder and Tipu led to a renaissance of interest in the Technology in Britain, where william Congreve, supplied with rocket cases from Mysore, developed what became known as Congreve rockets in the early 19th century.

The peak of Mysore's economic power was under Hyder Ali and his son Tipu Sultan in the post-Mughal era of the mid-late 18th century. They embarked on an ambitious program of economic development, aiming increase the wealth and revenue of Mysore. Under their reigns, Mysore overtook Bengal Subah as India's dominant economic power, with highly productive agriculture and textile Manufacturing.