Indium oxide is one of the basic oxides, and has been extensively studied due to its prominent applications in solar cells, optoelectronics, gas sensors and possesses some interesting chemical and structural peculiarities. In recent years, significant efforts have been made to fabricate these materials as nanosized particles. However, the surface structure and reactivity become increasingly important to the overall material properties as the particle size is reduced. We present a density functional theory (DFT) study of the water and oxygen molecules interaction with stoichiometric and defective (111) In2O3 (IO) surfaces. It is found that water environment destabilizes IO surface with respect to formation of oxygen vacancies. Single water molecule barrierlessly dissociates at all the oxygen vacancy sites except one position with the lowest defect formation energy where water dissociation energy is calculated to be 0.41eV. This should lead to increase of free electrons concentration up to some critical temperature where water dissociation heals surface defects. Another one effect that decreases eliminates free charge carriers is molecular oxygen chemisorptionon surface oxygen vacant sites. O2 species are adsorbed as peroxide ions that (i) decreases free electrons concentration and (ii) lead to appearance of extrapeaks in optical adsorption spectra. Combination of these factors governs free electrons concentration, i.e. conductivity of nanostructured IO.