diff --git a/internal/initwd/module_install.go b/internal/initwd/module_install.go
index 543405b5b..c07591bf7 100644
--- a/internal/initwd/module_install.go
+++ b/internal/initwd/module_install.go
@@ -2,7 +2,6 @@ package initwd
 
 import (
 	"fmt"
-	"github.com/hashicorp/terraform/registry"
 	"log"
 	"os"
 	"path/filepath"
@@ -13,6 +12,7 @@ import (
 	"github.com/hashicorp/terraform/addrs"
 	"github.com/hashicorp/terraform/internal/earlyconfig"
 	"github.com/hashicorp/terraform/internal/modsdir"
+	"github.com/hashicorp/terraform/registry"
 	"github.com/hashicorp/terraform/registry/regsrc"
 	"github.com/hashicorp/terraform/tfdiags"
 )
@@ -245,7 +245,18 @@ func (i *ModuleInstaller) installLocalModule(req *earlyconfig.ModuleRequest, key
 	// filesystem at all because the parent already wrote
 	// the files we need, and so we just load up what's already here.
 	newDir := filepath.Join(parentRecord.Dir, req.SourceAddr)
+
 	log.Printf("[TRACE] ModuleInstaller: %s uses directory from parent: %s", key, newDir)
+	// it is possible that the local directory is a symlink
+	newDir, err := filepath.EvalSymlinks(newDir)
+	if err != nil {
+		diags = diags.Append(tfdiags.Sourceless(
+			tfdiags.Error,
+			"Unreadable module directory",
+			fmt.Sprintf("Unable to evaluate directory symlink: %s", err.Error()),
+		))
+	}
+
 	mod, mDiags := earlyconfig.LoadModule(newDir)
 	if mod == nil {
 		// nil indicates missing or unreadable directory, so we'll
diff --git a/internal/initwd/module_install_test.go b/internal/initwd/module_install_test.go
index eb2e877c7..bd44ac344 100644
--- a/internal/initwd/module_install_test.go
+++ b/internal/initwd/module_install_test.go
@@ -111,6 +111,67 @@ func TestModuleInstaller_error(t *testing.T) {
 	}
 }
 
+func TestModuleInstaller_symlink(t *testing.T) {
+	fixtureDir := filepath.Clean("test-fixtures/local-module-symlink")
+	dir, done := tempChdir(t, fixtureDir)
+	defer done()
+
+	hooks := &testInstallHooks{}
+
+	modulesDir := filepath.Join(dir, ".terraform/modules")
+	inst := NewModuleInstaller(modulesDir, nil)
+	_, diags := inst.InstallModules(".", false, hooks)
+	assertNoDiagnostics(t, diags)
+
+	wantCalls := []testInstallHookCall{
+		{
+			Name:        "Install",
+			ModuleAddr:  "child_a",
+			PackageAddr: "",
+			LocalPath:   "child_a",
+		},
+		{
+			Name:        "Install",
+			ModuleAddr:  "child_a.child_b",
+			PackageAddr: "",
+			LocalPath:   "child_a/child_b",
+		},
+	}
+
+	if assertResultDeepEqual(t, hooks.Calls, wantCalls) {
+		return
+	}
+
+	loader, err := configload.NewLoader(&configload.Config{
+		ModulesDir: modulesDir,
+	})
+	if err != nil {
+		t.Fatal(err)
+	}
+
+	// Make sure the configuration is loadable now.
+	// (This ensures that correct information is recorded in the manifest.)
+	config, loadDiags := loader.LoadConfig(".")
+	assertNoDiagnostics(t, tfdiags.Diagnostics{}.Append(loadDiags))
+
+	wantTraces := map[string]string{
+		"":                "in root module",
+		"child_a":         "in child_a module",
+		"child_a.child_b": "in child_b module",
+	}
+	gotTraces := map[string]string{}
+	config.DeepEach(func(c *configs.Config) {
+		path := strings.Join(c.Path, ".")
+		if c.Module.Variables["v"] == nil {
+			gotTraces[path] = "<missing>"
+			return
+		}
+		varDesc := c.Module.Variables["v"].Description
+		gotTraces[path] = varDesc
+	})
+	assertResultDeepEqual(t, gotTraces, wantTraces)
+}
+
 func TestLoaderInstallModules_registry(t *testing.T) {
 	if os.Getenv("TF_ACC") == "" {
 		t.Skip("this test accesses registry.terraform.io and github.com; set TF_ACC=1 to run it")
diff --git a/internal/initwd/test-fixtures/local-module-symlink/child_a/child_a.tf b/internal/initwd/test-fixtures/local-module-symlink/child_a/child_a.tf
new file mode 100644
index 000000000..68ebb8e40
--- /dev/null
+++ b/internal/initwd/test-fixtures/local-module-symlink/child_a/child_a.tf
@@ -0,0 +1,9 @@
+
+variable "v" {
+  description = "in child_a module"
+  default     = ""
+}
+
+module "child_b" {
+  source = "./child_b"
+}
diff --git a/internal/initwd/test-fixtures/local-module-symlink/child_a/child_b/child_b.tf b/internal/initwd/test-fixtures/local-module-symlink/child_a/child_b/child_b.tf
new file mode 100644
index 000000000..e2e220916
--- /dev/null
+++ b/internal/initwd/test-fixtures/local-module-symlink/child_a/child_b/child_b.tf
@@ -0,0 +1,9 @@
+
+variable "v" {
+  description = "in child_b module"
+  default     = ""
+}
+
+output "hello" {
+  value = "Hello from child_b!"
+}
diff --git a/internal/initwd/test-fixtures/local-module-symlink/modules/child_a b/internal/initwd/test-fixtures/local-module-symlink/modules/child_a
new file mode 120000
index 000000000..0d568b143
--- /dev/null
+++ b/internal/initwd/test-fixtures/local-module-symlink/modules/child_a
@@ -0,0 +1 @@
+../child_a/
\ No newline at end of file
diff --git a/internal/initwd/test-fixtures/local-module-symlink/root.tf b/internal/initwd/test-fixtures/local-module-symlink/root.tf
new file mode 100644
index 000000000..1ca7ca32c
--- /dev/null
+++ b/internal/initwd/test-fixtures/local-module-symlink/root.tf
@@ -0,0 +1,9 @@
+
+variable "v" {
+  description = "in root module"
+  default     = ""
+}
+
+module "child_a" {
+  source = "./modules/child_a"
+}