diff --git a/tsc/internal/execute/build/orchestrator.go b/tsc/internal/execute/build/orchestrator.go
index a5ca48c30c234..f90f3d3de7826 100644
--- a/tsc/internal/execute/build/orchestrator.go
+++ b/tsc/internal/execute/build/orchestrator.go
@@ -507,10 +507,7 @@ func (o *Orchestrator) computeDesiredWatches() map[string]bool {
 		// Input file directories not already covered
 		for _, fileName := range task.resolved.FileNames() {
 			absPath := tspath.GetNormalizedAbsolutePath(fileName, o.opts.Sys.GetCurrentDirectory())
-			dir := tspath.GetDirectoryPath(absPath)
-			if !desiredDirs.Covered(dir) && watchmanager.CanWatchDirectory(dir) {
-				desiredDirs.Set(dir, false)
-			}
+			o.addProgramFileWatchDir(desiredDirs, tspath.GetDirectoryPath(absPath))
 			for _, mapper := range task.resolved.ContentMappers() {
 				if mapper.PackageDirectory == "" || mapper.ContributionID != "" {
 					continue
@@ -549,10 +546,7 @@ func (o *Orchestrator) computeDesiredWatches() map[string]bool {
 				if roots.Has(fp) {
 					continue
 				}
-				dir := tspath.GetDirectoryPath(absPath)
-				if !desiredDirs.Covered(dir) && watchmanager.CanWatchDirectory(dir) {
-					desiredDirs.Set(dir, false)
-				}
+				o.addProgramFileWatchDir(desiredDirs, tspath.GetDirectoryPath(absPath))
 			}
 			for packageJson := range bi.buildInfo.GetPackageJsons(buildInfoDir) {
 				o.addPackageJsonWatchDirs(desiredDirs, packageJson)
@@ -575,6 +569,14 @@ func (o *Orchestrator) addWatchDir(desiredDirs *watchmanager.DirWatchSet, dir st
 	}
 }
 
+// addProgramFileWatchDir watches the directory of a program file at any depth, unlike addWatchDir, which guards lookup
+// locations against watching something as generic as / or /home.
+func (o *Orchestrator) addProgramFileWatchDir(desiredDirs *watchmanager.DirWatchSet, dir string) {
+	if !desiredDirs.Covered(dir) {
+		desiredDirs.Set(dir, false)
+	}
+}
+
 func (o *Orchestrator) addPackageJsonWatchDirs(desiredDirs *watchmanager.DirWatchSet, packageJson string) {
 	dir := tspath.GetDirectoryPath(packageJson)
 	dirs := []string{dir}
diff --git a/tsc/internal/execute/tsctests/watch_shallow_test.go b/tsc/internal/execute/tsctests/watch_shallow_test.go
new file mode 100644
index 0000000000000..79dc968eeb2cb
--- /dev/null
+++ b/tsc/internal/execute/tsctests/watch_shallow_test.go
@@ -0,0 +1,134 @@
+package tsctests
+
+import (
+	"context"
+	"strings"
+	"testing"
+
+	"github.com/microsoft/TypeScript/tsc/internal/execute"
+	"github.com/microsoft/TypeScript/tsc/internal/fswatch"
+	"gotest.tools/v3/assert"
+)
+
+// shallowProjectFiles is a project close to the filesystem root (a common Docker WORKDIR) that imports a file from a
+// sibling directory which is not part of "include", plus a bare import whose failed lookups walk up to /node_modules.
+func shallowProjectFiles(compilerOptions string) FileMap {
+	return FileMap{
+		"/app/tsconfig.json": `{"compilerOptions":{` + compilerOptions + `"rootDir":"..","outDir":"out","noLib":true},"include":["*.ts"]}`,
+		"/app/index.ts": `import { s } from "../shared/s";
+// @ts-ignore
+import "missing-package";
+export const x = s;`,
+		"/shared/s.ts": `export const s = 1;`,
+	}
+}
+
+// isWatched reports whether dir has an open watch. The mock keeps closed watches in Dirs, so a nil check is not enough.
+func isWatched(sys *TestSys, dir string) bool {
+	w := sys.mockWatchBackend.Dirs[dir]
+	return w != nil && !w.Closed
+}
+
+func assertShallowProjectWatches(t *testing.T, sys *TestSys) {
+	t.Helper()
+	assert.Assert(t, isWatched(sys, "/app"), "the tsconfig directory /app must be watched")
+	assert.Assert(t, isWatched(sys, "/shared"), "the directory of the imported program file /shared/s.ts must be watched")
+	// Failed lookups of "missing-package" reach /node_modules. They must not turn into a watch on /.
+	assert.Assert(t, !isWatched(sys, "/"), "/ must never be watched")
+}
+
+func editShallowProjectFiles(t *testing.T, sys *TestSys, w interface{ DoCycle() }) {
+	t.Helper()
+	fs := sys.fsFromFileMap()
+
+	sys.writeFileNoError("/shared/s.ts", `export const s = 2;`)
+	sys.mockWatchBackend.SendEvents([]fswatch.Event{{Kind: fswatch.EventUpdate, Path: "/shared/s.ts"}})
+	w.DoCycle()
+	out, _ := fs.ReadFile("/app/out/shared/s.js")
+	assert.Assert(t, strings.Contains(out, "s = 2"), "editing /shared/s.ts must rebuild, got:\n%s", out)
+
+	sys.writeFileNoError("/app/index.ts", `import { s } from "../shared/s"; export const y = s;`)
+	sys.mockWatchBackend.SendEvents([]fswatch.Event{{Kind: fswatch.EventUpdate, Path: "/app/index.ts"}})
+	w.DoCycle()
+	out, _ = fs.ReadFile("/app/out/app/index.js")
+	assert.Assert(t, strings.Contains(out, "y = "), "editing /app/index.ts must rebuild, got:\n%s", out)
+}
+
+// TestWatchShallowProjectWithImportedFile verifies that tsc --watch rebuilds a project that lives close to the
+// filesystem root, both for its own files and for a file it imports from outside "include".
+func TestWatchShallowProjectWithImportedFile(t *testing.T) {
+	t.Parallel()
+	sys := newTestSys(&tscInput{files: shallowProjectFiles(""), cwd: "/app"}, false)
+	result := execute.CommandLine(context.Background(), sys, []string{"--watch"}, sys)
+	assert.Assert(t, result.Watcher != nil)
+
+	assertShallowProjectWatches(t, sys)
+	editShallowProjectFiles(t, sys, result.Watcher)
+}
+
+// TestBuildWatchShallowProjectWithImportedFile is the tsc -b --watch variant of
+// TestWatchShallowProjectWithImportedFile.
+func TestBuildWatchShallowProjectWithImportedFile(t *testing.T) {
+	t.Parallel()
+	sys := newTestSys(&tscInput{files: shallowProjectFiles(`"composite":true,`), cwd: "/app"}, false)
+	ctx, cancel := context.WithCancel(t.Context())
+	defer cancel()
+	result := execute.CommandLine(ctx, sys, []string{"--build", "--watch"}, sys)
+	assert.Assert(t, result.Watcher != nil)
+
+	assertShallowProjectWatches(t, sys)
+	editShallowProjectFiles(t, sys, result.Watcher)
+}
+
+// shallowRootFileProjectFiles is a project in /app whose "files" list a root file in the sibling directory /shared.
+func shallowRootFileProjectFiles(compilerOptions string) FileMap {
+	return FileMap{
+		"/app/tsconfig.json": `{"compilerOptions":{` + compilerOptions + `"rootDir":"..","outDir":"out","noLib":true},"files":["index.ts","../shared/root.ts"]}`,
+		"/app/index.ts":      `export const x = 1;`,
+		"/shared/root.ts":    `export const r = 1;`,
+	}
+}
+
+// deleteAndRecreateShallowRootFile deletes /shared/root.ts and writes it back. While the file is missing it is not
+// part of the program, but it is still a root file, so /shared must stay watched for the rebuild on recreation.
+func deleteAndRecreateShallowRootFile(t *testing.T, sys *TestSys, w interface{ DoCycle() }) {
+	t.Helper()
+	fs := sys.fsFromFileMap()
+	assert.Assert(t, isWatched(sys, "/shared"), "the directory of the root file /shared/root.ts must be watched")
+
+	sys.removeNoError("/shared/root.ts")
+	sys.mockWatchBackend.SendEvents([]fswatch.Event{{Kind: fswatch.EventDelete, Path: "/shared/root.ts"}})
+	w.DoCycle()
+	assert.Assert(t, isWatched(sys, "/shared"), "/shared must stay watched while the root file /shared/root.ts is missing")
+	assert.Assert(t, !isWatched(sys, "/"), "/ must never be watched")
+
+	sys.writeFileNoError("/shared/root.ts", `export const r = 2;`)
+	sys.mockWatchBackend.SendEvents([]fswatch.Event{{Kind: fswatch.EventUpdate, Path: "/shared/root.ts"}})
+	w.DoCycle()
+	out, _ := fs.ReadFile("/app/out/shared/root.js")
+	assert.Assert(t, strings.Contains(out, "r = 2"), "recreating /shared/root.ts must rebuild, got:\n%s", out)
+}
+
+// TestWatchShallowProjectRecreatedRootFile verifies that tsc --watch rebuilds when a root file near the filesystem
+// root is deleted and created again.
+func TestWatchShallowProjectRecreatedRootFile(t *testing.T) {
+	t.Parallel()
+	sys := newTestSys(&tscInput{files: shallowRootFileProjectFiles(""), cwd: "/app"}, false)
+	result := execute.CommandLine(context.Background(), sys, []string{"--watch"}, sys)
+	assert.Assert(t, result.Watcher != nil)
+
+	deleteAndRecreateShallowRootFile(t, sys, result.Watcher)
+}
+
+// TestBuildWatchShallowProjectRecreatedRootFile is the tsc -b --watch variant of
+// TestWatchShallowProjectRecreatedRootFile.
+func TestBuildWatchShallowProjectRecreatedRootFile(t *testing.T) {
+	t.Parallel()
+	sys := newTestSys(&tscInput{files: shallowRootFileProjectFiles(`"composite":true,`), cwd: "/app"}, false)
+	ctx, cancel := context.WithCancel(t.Context())
+	defer cancel()
+	result := execute.CommandLine(ctx, sys, []string{"--build", "--watch"}, sys)
+	assert.Assert(t, result.Watcher != nil)
+
+	deleteAndRecreateShallowRootFile(t, sys, result.Watcher)
+}
diff --git a/tsc/internal/execute/watcher.go b/tsc/internal/execute/watcher.go
index 3a3b9405340c9..ca5d5f8b54795 100644
--- a/tsc/internal/execute/watcher.go
+++ b/tsc/internal/execute/watcher.go
@@ -252,9 +252,22 @@ func (w *Watcher) computeDesiredWatches(seenFilePaths []string) map[string]bool
 	for dir, recursive := range resolvedDirs {
 		coverage.Set(dir, recursive)
 	}
+	programFiles := w.program.GetProgram().FilesByPath()
+	caseSensitive := w.sys.FS().UseCaseSensitiveFileNames()
+	rootFiles := collections.NewSetFromItems(core.Map(w.config.FileNames(), func(fileName string) tspath.Path {
+		return tspath.ToPath(fileName, cwd, caseSensitive)
+	})...)
 	for _, filePath := range seenFilePaths {
 		dir := tspath.GetDirectoryPath(filePath)
-		if !coverage.Covered(dir) && watchmanager.CanWatchDirectory(dir) {
+		if coverage.Covered(dir) {
+			continue
+		}
+		// Seen files mix program files with lookup locations. Only lookups keep the depth check, so an imported
+		// file outside the tsconfig directory (say /shared next to /app) is still watched. A root file is not in
+		// the program while it is missing, but its directory stays watched so that recreating it rebuilds.
+		p := tspath.ToPath(filePath, cwd, caseSensitive)
+		_, isProgramFile := programFiles[p]
+		if isProgramFile || rootFiles.Has(p) || watchmanager.CanWatchDirectory(dir) {
 			coverage.Set(dir, false)
 		}
 	}
diff --git a/tsc/internal/execute/watchmanager/watchmanager.go b/tsc/internal/execute/watchmanager/watchmanager.go
index f037d93e2f863..dd6490e9d6a68 100644
--- a/tsc/internal/execute/watchmanager/watchmanager.go
+++ b/tsc/internal/execute/watchmanager/watchmanager.go
@@ -195,6 +195,13 @@ func (wm *WatchManager) createDirWatchRequest(dir string, entry *watchedDir) Wat
 func (wm *WatchManager) ResolveDesiredDirs(desiredDirs map[string]bool) map[string]bool {
 	resolved := make(map[string]bool, len(desiredDirs))
 	for dir, recursive := range desiredDirs {
+		// Only directories on disk can be watched. The embedded libs (bundled:///libs) exist in the FS but not on disk.
+		if !tspath.IsRootedDiskPath(dir) {
+			if wm.DebugLog != nil {
+				fmt.Fprintf(wm.DebugLog, "[watch] not a disk path: %s\n", dir)
+			}
+			continue
+		}
 		watchDir := dir
 		watchRecursive := recursive
 		for !wm.dirExists(watchDir) {
@@ -205,7 +212,10 @@ func (wm *WatchManager) ResolveDesiredDirs(desiredDirs map[string]bool) map[stri
 			watchDir = parent
 			watchRecursive = false // ancestor fallbacks are always non-recursive
 		}
-		if !wm.dirExists(watchDir) || !CanWatchDirectory(watchDir) {
+		// CanWatchDirectory only guards against falling back to an ancestor that is too generic to watch
+		// (/, /home, ...). A directory that exists and was asked for is watched at any depth, otherwise a
+		// project that lives near the filesystem root (say /app or /srv/app) would never be watched.
+		if !wm.dirExists(watchDir) || (watchDir != dir && !CanWatchDirectory(watchDir)) {
 			if wm.DebugLog != nil {
 				fmt.Fprintf(wm.DebugLog, "[watch] no watchable ancestor for %s\n", dir)
 			}
diff --git a/tsc/internal/execute/watchmanager/watchmanager_test.go b/tsc/internal/execute/watchmanager/watchmanager_test.go
index 633afde563c34..bbc17792290e6 100644
--- a/tsc/internal/execute/watchmanager/watchmanager_test.go
+++ b/tsc/internal/execute/watchmanager/watchmanager_test.go
@@ -1,6 +1,7 @@
 package watchmanager
 
 import (
+	"io"
 	"testing"
 
 	"github.com/microsoft/TypeScript/tsc/internal/tspath"
@@ -135,3 +136,65 @@ func TestDirWatchSetDirs(t *testing.T) {
 	assert.Equal(t, dirs["/repo/a"], false)
 	assert.Equal(t, dirs["/repo/b"], true)
 }
+
+// TestResolveDesiredDirsShallowProject verifies that a directory that exists and was asked for is watched at any
+// depth. A project close to the filesystem root (/app, /srv/app, a Docker WORKDIR) must not be silently ignored.
+func TestResolveDesiredDirsShallowProject(t *testing.T) {
+	t.Parallel()
+
+	existing := map[string]bool{
+		"/": true, "/app": true, "/app/src": true, "/srv": true, "/srv/app": true,
+		"/home": true, "/home/user": true, "/home/user/project": true,
+	}
+	wm := NewWatchManager(io.Discard, func(dir string) bool { return existing[dir] })
+
+	resolved := wm.ResolveDesiredDirs(map[string]bool{
+		"/app":               true,
+		"/app/src":           false,
+		"/srv/app":           true,
+		"/home/user/project": true,
+	})
+
+	assert.DeepEqual(t, resolved, map[string]bool{
+		"/app":               true,
+		"/app/src":           false,
+		"/srv/app":           true,
+		"/home/user/project": true,
+	})
+}
+
+// TestResolveDesiredDirsAncestorFallback verifies that the depth check still guards the fallback to an ancestor,
+// so a missing directory never turns into a watch on something too generic like /, /home or /home/user.
+func TestResolveDesiredDirsAncestorFallback(t *testing.T) {
+	t.Parallel()
+
+	existing := map[string]bool{
+		"/": true, "/app": true, "/home": true, "/home/user": true,
+		"/repo": true, "/repo/a": true, "/repo/a/b": true, "/repo/a/b/c": true,
+	}
+	wm := NewWatchManager(io.Discard, func(dir string) bool { return existing[dir] })
+
+	resolved := wm.ResolveDesiredDirs(map[string]bool{
+		"/app/missing":              true, // ancestor /app is too shallow
+		"/home/user/missing":        true, // ancestor /home/user is too shallow
+		"/repo/a/b/c/missing/deep":  true, // ancestor /repo/a/b/c is deep enough, and is never recursive
+		"/nothing/exists/anywhere/": true, // no existing ancestor except /
+	})
+
+	assert.DeepEqual(t, resolved, map[string]bool{"/repo/a/b/c": false})
+}
+
+// TestResolveDesiredDirsSkipsNonDiskPaths verifies that a directory that is not on disk, such as the embedded libs
+// (bundled:///libs), is never watched, even though the wrapped FS reports that it exists.
+func TestResolveDesiredDirsSkipsNonDiskPaths(t *testing.T) {
+	t.Parallel()
+
+	wm := NewWatchManager(io.Discard, func(dir string) bool { return true })
+
+	resolved := wm.ResolveDesiredDirs(map[string]bool{
+		"bundled:///libs": false,
+		"/app":            true,
+	})
+
+	assert.DeepEqual(t, resolved, map[string]bool{"/app": true})
+}