diff --git a/.changeset/selfish-boxes-fry.md b/.changeset/selfish-boxes-fry.md
new file mode 100644
index 00000000000..2719120cc8e
--- /dev/null
+++ b/.changeset/selfish-boxes-fry.md
@@ -0,0 +1,50 @@
+---
+"@pnpm/resolve-dependencies": patch
+"pnpm": patch
+---
+
+The location of an injected directory dependency should be correctly located, when there is a chain of local dependencies (declared via the `file:` protocol`).
+
+The next scenario was not working prior to the fix. There are 3 projects in the same folder: foo, bar, qar.
+
+`foo/package.json`:
+
+```json
+{
+  "name": "foo",
+  "dependencies": {
+    "bar": "file:../bar"
+  },
+  "dependenciesMeta": {
+    "bar": {
+      "injected": true
+    }
+  }
+}
+```
+
+`bar/package.json`:
+
+```json
+{
+  "name": "bar",
+  "dependencies": {
+    "qar": "file:../qar"
+  },
+  "dependenciesMeta": {
+    "qar": {
+      "injected": true
+    }
+  }
+}
+```
+
+`qar/package.json`:
+
+```json
+{
+  "name": "qar"
+}
+```
+
+Related PR: [#4415](https://github.com/pnpm/pnpm/pull/4415).
diff --git a/packages/core/test/install/injectLocalPackages.ts b/packages/core/test/install/injectLocalPackages.ts
index 75048635f3b..14bf2583837 100644
--- a/packages/core/test/install/injectLocalPackages.ts
+++ b/packages/core/test/install/injectLocalPackages.ts
@@ -5,6 +5,7 @@ import { MutatedProject, mutateModules } from '@pnpm/core'
 import { preparePackages } from '@pnpm/prepare'
 import rimraf from '@zkochan/rimraf'
 import pathExists from 'path-exists'
+import { sync as writeJsonFile } from 'write-json-file'
 import { testDefaults } from '../utils'
 
 test('inject local packages', async () => {
@@ -224,6 +225,224 @@ test('inject local packages', async () => {
   }
 })
 
+test('inject local packages declared via file protocol', async () => {
+  const project1Manifest = {
+    name: 'project-1',
+    version: '1.0.0',
+    dependencies: {
+      'is-negative': '1.0.0',
+    },
+    devDependencies: {
+      'dep-of-pkg-with-1-dep': '100.0.0',
+    },
+    peerDependencies: {
+      'is-positive': '>=1.0.0',
+    },
+  }
+  const project2Manifest = {
+    name: 'project-2',
+    version: '1.0.0',
+    dependencies: {
+      'project-1': 'file:../project-1',
+    },
+    devDependencies: {
+      'is-positive': '1.0.0',
+    },
+    dependenciesMeta: {
+      'project-1': {
+        injected: true,
+      },
+    },
+  }
+  const project3Manifest = {
+    name: 'project-3',
+    version: '1.0.0',
+    dependencies: {
+      'project-2': 'file:../project-2',
+    },
+    devDependencies: {
+      'is-positive': '2.0.0',
+    },
+    dependenciesMeta: {
+      'project-2': {
+        injected: true,
+      },
+    },
+  }
+  const projects = preparePackages([
+    {
+      location: 'project-1',
+      package: project1Manifest,
+    },
+    {
+      location: 'project-2',
+      package: project2Manifest,
+    },
+    {
+      location: 'project-3',
+      package: project3Manifest,
+    },
+  ])
+
+  const importers: MutatedProject[] = [
+    {
+      buildIndex: 0,
+      manifest: project1Manifest,
+      mutation: 'install',
+      rootDir: path.resolve('project-1'),
+    },
+    {
+      buildIndex: 0,
+      manifest: project2Manifest,
+      mutation: 'install',
+      rootDir: path.resolve('project-2'),
+    },
+    {
+      buildIndex: 0,
+      manifest: project3Manifest,
+      mutation: 'install',
+      rootDir: path.resolve('project-3'),
+    },
+  ]
+  const workspacePackages = {
+    'project-1': {
+      '1.0.0': {
+        dir: path.resolve('project-1'),
+        manifest: project1Manifest,
+      },
+    },
+    'project-2': {
+      '1.0.0': {
+        dir: path.resolve('project-2'),
+        manifest: project2Manifest,
+      },
+    },
+    'project-3': {
+      '1.0.0': {
+        dir: path.resolve('project-3'),
+        manifest: project2Manifest,
+      },
+    },
+  }
+  await mutateModules(importers, await testDefaults({
+    workspacePackages,
+  }))
+
+  await projects['project-1'].has('is-negative')
+  await projects['project-1'].has('dep-of-pkg-with-1-dep')
+  await projects['project-1'].hasNot('is-positive')
+
+  await projects['project-2'].has('is-positive')
+  await projects['project-2'].has('project-1')
+
+  await projects['project-3'].has('is-positive')
+  await projects['project-3'].has('project-2')
+
+  expect(fs.readdirSync('node_modules/.pnpm').length).toBe(8)
+
+  const rootModules = assertProject(process.cwd())
+  {
+    const lockfile = await rootModules.readLockfile()
+    expect(lockfile.importers['project-2'].dependenciesMeta).toEqual({
+      'project-1': {
+        injected: true,
+      },
+    })
+    expect(lockfile.packages['file:project-1_is-positive@1.0.0']).toEqual({
+      resolution: {
+        directory: 'project-1',
+        type: 'directory',
+      },
+      id: 'file:project-1',
+      name: 'project-1',
+      version: '1.0.0',
+      peerDependencies: {
+        'is-positive': '>=1.0.0',
+      },
+      dependencies: {
+        'is-negative': '1.0.0',
+        'is-positive': '1.0.0',
+      },
+      dev: false,
+    })
+    expect(lockfile.packages['file:project-2_is-positive@2.0.0']).toEqual({
+      resolution: {
+        directory: 'project-2',
+        type: 'directory',
+      },
+      id: 'file:project-2',
+      name: 'project-2',
+      version: '1.0.0',
+      dependencies: {
+        'project-1': 'file:project-1_is-positive@2.0.0',
+      },
+      transitivePeerDependencies: ['is-positive'],
+      dev: false,
+    })
+
+    const modulesState = await rootModules.readModulesManifest()
+    expect(modulesState?.injectedDeps?.['project-1'].length).toEqual(2)
+    expect(modulesState?.injectedDeps?.['project-1'][0]).toContain(`node_modules${path.sep}.pnpm`)
+    expect(modulesState?.injectedDeps?.['project-1'][1]).toContain(`node_modules${path.sep}.pnpm`)
+  }
+
+  await rimraf('node_modules')
+  await rimraf('project-1/node_modules')
+  await rimraf('project-2/node_modules')
+  await rimraf('project-3/node_modules')
+
+  await mutateModules(importers, await testDefaults({
+    frozenLockfile: true,
+    workspacePackages,
+  }))
+
+  await projects['project-1'].has('is-negative')
+  await projects['project-1'].has('dep-of-pkg-with-1-dep')
+  await projects['project-1'].hasNot('is-positive')
+
+  await projects['project-2'].has('is-positive')
+  await projects['project-2'].has('project-1')
+
+  await projects['project-3'].has('is-positive')
+  await projects['project-3'].has('project-2')
+
+  expect(fs.readdirSync('node_modules/.pnpm').length).toBe(8)
+
+  // The injected project is updated when one of its dependencies needs to be updated
+  importers[0].manifest.dependencies!['is-negative'] = '2.0.0'
+  writeJsonFile('project-1/package.json', importers[0].manifest)
+  await mutateModules(importers, await testDefaults({ workspacePackages }))
+  {
+    const lockfile = await rootModules.readLockfile()
+    expect(lockfile.importers['project-2'].dependenciesMeta).toEqual({
+      'project-1': {
+        injected: true,
+      },
+    })
+    expect(lockfile.packages['file:project-1_is-positive@1.0.0']).toEqual({
+      resolution: {
+        directory: 'project-1',
+        type: 'directory',
+      },
+      id: 'file:project-1',
+      name: 'project-1',
+      version: '1.0.0',
+      peerDependencies: {
+        'is-positive': '>=1.0.0',
+      },
+      dependencies: {
+        'is-negative': '2.0.0',
+        'is-positive': '1.0.0',
+      },
+      dev: false,
+    })
+    const modulesState = await rootModules.readModulesManifest()
+    expect(modulesState?.injectedDeps?.['project-1'].length).toEqual(2)
+    expect(modulesState?.injectedDeps?.['project-1'][0]).toContain(`node_modules${path.sep}.pnpm`)
+    expect(modulesState?.injectedDeps?.['project-1'][1]).toContain(`node_modules${path.sep}.pnpm`)
+  }
+})
+
 test('inject local packages and relink them after build', async () => {
   const project1Manifest = {
     name: 'project-1',
diff --git a/packages/resolve-dependencies/src/resolveDependencies.ts b/packages/resolve-dependencies/src/resolveDependencies.ts
index d8381791fed..1ad99d3fc58 100644
--- a/packages/resolve-dependencies/src/resolveDependencies.ts
+++ b/packages/resolve-dependencies/src/resolveDependencies.ts
@@ -619,7 +619,12 @@ async function resolveDependency (
       lockfileDir: ctx.lockfileDir,
       preferredVersions: options.preferredVersions,
       preferWorkspacePackages: ctx.preferWorkspacePackages,
-      projectDir: options.currentDepth > 0 ? ctx.lockfileDir : ctx.prefix,
+      projectDir: (
+        options.currentDepth > 0 &&
+        !wantedDependency.pref.startsWith('file:')
+      )
+        ? ctx.lockfileDir
+        : ctx.prefix,
       registry: wantedDependency.alias && pickRegistryForPackage(ctx.registries, wantedDependency.alias, wantedDependency.pref) || ctx.registries.default,
       // Unfortunately, even when run with --lockfile-only, we need the *real* package.json
       // so fetching of the tarball cannot be ever avoided. Related issue: https://github.com/pnpm/pnpm/issues/1176