diff --git a/tests/generation/test_utils.py b/tests/generation/test_utils.py
index e92d1e1ec77a..973ce7ab422c 100644
--- a/tests/generation/test_utils.py
+++ b/tests/generation/test_utils.py
@@ -22,6 +22,7 @@
 import tempfile
 import unittest
 import warnings
+from pathlib import Path
 
 import numpy as np
 import pytest
@@ -4985,6 +4986,27 @@ def test_custom_generate_requires_trust_remote_code(self):
         with self.assertRaises(ValueError):
             model.generate(**model_inputs, custom_generate="transformers-community/custom_generate_example")
 
+    def test_custom_generate_local_directory(self):
+        """Tests that custom_generate works with local directories containing importable relative modules"""
+        with tempfile.TemporaryDirectory() as tmp_dir:
+            custom_generate_dir = Path(tmp_dir) / "custom_generate"
+            custom_generate_dir.mkdir()
+            with open(custom_generate_dir / "generate.py", "w") as f:
+                f.write("from .helper import ret_success\ndef generate(*args, **kwargs):\n    return ret_success()\n")
+            with open(custom_generate_dir / "helper.py", "w") as f:
+                f.write('def ret_success():\n    return "success"\n')
+            model = AutoModelForCausalLM.from_pretrained(
+                "hf-internal-testing/tiny-random-MistralForCausalLM", device_map="auto"
+            )
+            tokenizer = AutoTokenizer.from_pretrained("hf-internal-testing/tiny-random-MistralForCausalLM")
+            model_inputs = tokenizer("Hello, world!", return_tensors="pt").to(model.device)
+            value = model.generate(
+                **model_inputs,
+                custom_generate=str(tmp_dir),
+                trust_remote_code=True,
+            )
+            assert value == "success"
+
 
 @require_torch
 class TokenHealingTestCase(unittest.TestCase):