diff --git a/.changeset/old-otters-sleep.md b/.changeset/old-otters-sleep.md
new file mode 100644
index 00000000000..8ca6bf06ede
--- /dev/null
+++ b/.changeset/old-otters-sleep.md
@@ -0,0 +1,6 @@
+---
+"@pnpm/hooks.read-package-hook": patch
+"pnpm": patch
+---
+
+It should be possible to override a dependency with a local package using relative path from the workspace root directory [#5493](https://github.com/pnpm/pnpm/issues/5493).
diff --git a/hooks/read-package-hook/src/createVersionsOverrider.ts b/hooks/read-package-hook/src/createVersionsOverrider.ts
index a61c792c1fc..69e2cc03fd1 100644
--- a/hooks/read-package-hook/src/createVersionsOverrider.ts
+++ b/hooks/read-package-hook/src/createVersionsOverrider.ts
@@ -16,9 +16,14 @@ export function createVersionsOverrider (
         if (override.newPref.startsWith('link:')) {
           linkTarget = path.join(rootDir, override.newPref.substring(5))
         }
+        let linkFileTarget: string | undefined
+        if (override.newPref.startsWith('file:')) {
+          linkFileTarget = path.join(rootDir, override.newPref.substring(5))
+        }
         return {
           ...override,
           linkTarget,
+          linkFileTarget,
         }
       })
   ) as [VersionOverrideWithParent[], VersionOverride[]]
@@ -44,6 +49,7 @@ interface VersionOverride {
   }
   newPref: string
   linkTarget?: string
+  linkFileTarget?: string
 }
 
 interface VersionOverrideWithParent extends VersionOverride {
@@ -72,6 +78,10 @@ function overrideDeps (versionOverrides: VersionOverride[], deps: Dependencies,
       deps[versionOverride.targetPkg.name] = `link:${normalizePath(path.relative(dir, versionOverride.linkTarget))}`
       continue
     }
+    if (versionOverride.linkFileTarget) {
+      deps[versionOverride.targetPkg.name] = `file:${versionOverride.linkFileTarget}`
+      continue
+    }
     deps[versionOverride.targetPkg.name] = versionOverride.newPref
   }
 }
diff --git a/hooks/read-package-hook/test/createVersionOverrider.test.ts b/hooks/read-package-hook/test/createVersionOverrider.test.ts
index 4d918b1345b..4341d3851a3 100644
--- a/hooks/read-package-hook/test/createVersionOverrider.test.ts
+++ b/hooks/read-package-hook/test/createVersionOverrider.test.ts
@@ -252,3 +252,22 @@ test('createVersionsOverrider() should work for scoped parent and scoped child',
     },
   })
 })
+
+test('createVersionsOverrider() overrides dependencies with file', () => {
+  const overrider = createVersionsOverrider({
+    qar: 'file:../qar',
+  }, process.cwd())
+  expect(overrider({
+    name: 'foo',
+    version: '1.2.0',
+    dependencies: {
+      qar: '3.0.0',
+    },
+  }, path.resolve('pkg'))).toStrictEqual({
+    name: 'foo',
+    version: '1.2.0',
+    dependencies: {
+      qar: `file:${path.resolve('../qar')}`,
+    },
+  })
+})
diff --git a/resolving/local-resolver/test/index.ts b/resolving/local-resolver/test/index.ts
index 0cb31ed6b91..0412a1910ad 100644
--- a/resolving/local-resolver/test/index.ts
+++ b/resolving/local-resolver/test/index.ts
@@ -12,6 +12,17 @@ test('resolve directory', async () => {
   expect(resolveResult!.resolution['type']).toEqual('directory')
 })
 
+test('resolve directory specified using absolute path', async () => {
+  const linkedDir = path.join(__dirname, '..')
+  const normalizedLinkedDir = normalize(linkedDir)
+  const resolveResult = await resolveFromLocal({ pref: `link:${linkedDir}` }, { projectDir: __dirname })
+  expect(resolveResult!.id).toEqual('link:..')
+  expect(resolveResult!.normalizedPref).toEqual(`link:${normalizedLinkedDir}`)
+  expect(resolveResult!['manifest']!.name).toEqual('@pnpm/local-resolver')
+  expect(resolveResult!.resolution['directory']).toEqual(normalizedLinkedDir)
+  expect(resolveResult!.resolution['type']).toEqual('directory')
+})
+
 test('resolve injected directory', async () => {
   const resolveResult = await resolveFromLocal({ injected: true, pref: '..' }, { projectDir: __dirname })
   expect(resolveResult!.id).toEqual('file:..')