diff --git a/src/librustc_builtin_macros/source_util.rs b/src/librustc_builtin_macros/source_util.rs
index 662bbe6a287a3..718498f04b94e 100644
--- a/src/librustc_builtin_macros/source_util.rs
+++ b/src/librustc_builtin_macros/source_util.rs
@@ -4,6 +4,7 @@ use rustc_ast::token;
 use rustc_ast::tokenstream::TokenStream;
 use rustc_ast_pretty::pprust;
 use rustc_expand::base::{self, *};
+use rustc_expand::module::DirectoryOwnership;
 use rustc_expand::panictry;
 use rustc_parse::{self, new_sub_parser_from_file, parser::Parser};
 use rustc_session::lint::builtin::INCOMPLETE_INCLUDE;
@@ -11,6 +12,7 @@ use rustc_span::symbol::Symbol;
 use rustc_span::{self, Pos, Span};
 
 use smallvec::SmallVec;
+use std::rc::Rc;
 
 use rustc_data_structures::sync::Lrc;
 
@@ -101,7 +103,7 @@ pub fn expand_include<'cx>(
         None => return DummyResult::any(sp),
     };
     // The file will be added to the code map by the parser
-    let file = match cx.resolve_path(file, sp) {
+    let mut file = match cx.resolve_path(file, sp) {
         Ok(f) => f,
         Err(mut err) => {
             err.emit();
@@ -110,6 +112,15 @@ pub fn expand_include<'cx>(
     };
     let p = new_sub_parser_from_file(cx.parse_sess(), &file, None, sp);
 
+    // If in the included file we have e.g., `mod bar;`,
+    // then the path of `bar.rs` should be relative to the directory of `file`.
+    // See https://github.com/rust-lang/rust/pull/69838/files#r395217057 for a discussion.
+    // `MacroExpander::fully_expand_fragment` later restores, so "stack discipline" is maintained.
+    file.pop();
+    cx.current_expansion.directory_ownership = DirectoryOwnership::Owned { relative: None };
+    let mod_path = cx.current_expansion.module.mod_path.clone();
+    cx.current_expansion.module = Rc::new(ModuleData { mod_path, directory: file });
+
     struct ExpandResult<'a> {
         p: Parser<'a>,
     }
diff --git a/src/test/ui/macros/issue-69838-dir/bar.rs b/src/test/ui/macros/issue-69838-dir/bar.rs
new file mode 100644
index 0000000000000..ec12f8c5cb442
--- /dev/null
+++ b/src/test/ui/macros/issue-69838-dir/bar.rs
@@ -0,0 +1,3 @@
+// ignore-test -- this is an auxiliary file as part of another test.
+
+pub fn i_am_in_bar() {}
diff --git a/src/test/ui/macros/issue-69838-dir/included.rs b/src/test/ui/macros/issue-69838-dir/included.rs
new file mode 100644
index 0000000000000..9900b8fd5092c
--- /dev/null
+++ b/src/test/ui/macros/issue-69838-dir/included.rs
@@ -0,0 +1,3 @@
+// ignore-test -- this is an auxiliary file as part of another test.
+
+pub mod bar;
diff --git a/src/test/ui/macros/issue-69838-mods-relative-to-included-path.rs b/src/test/ui/macros/issue-69838-mods-relative-to-included-path.rs
new file mode 100644
index 0000000000000..2a4e97f0ef5f1
--- /dev/null
+++ b/src/test/ui/macros/issue-69838-mods-relative-to-included-path.rs
@@ -0,0 +1,7 @@
+// check-pass
+
+include!("issue-69838-dir/included.rs");
+
+fn main() {
+    bar::i_am_in_bar();
+}