diff --git a/backend/e2e-test/routes/v3/secret-reference.spec.ts b/backend/e2e-test/routes/v3/secret-reference.spec.ts
index ad5699c877d..7c22b9c843f 100644
--- a/backend/e2e-test/routes/v3/secret-reference.spec.ts
+++ b/backend/e2e-test/routes/v3/secret-reference.spec.ts
@@ -141,6 +141,100 @@ describe("Secret expansion", () => {
     await Promise.all(secrets.map((el) => deleteSecretV2(el)));
   });
 
+  test("Local secret reference to non-existent secret keeps literal reference", async () => {
+    const secrets = [
+      {
+        environmentSlug: seedData1.environment.slug,
+        workspaceId: projectId,
+        secretPath: "/",
+        authToken: jwtAuthToken,
+        key: "TEST",
+        // eslint-disable-next-line
+        value: "hello ${NON_EXISTENT_SECRET}"
+      }
+    ];
+
+    for (const secret of secrets) {
+      // eslint-disable-next-line no-await-in-loop
+      await createSecretV2(secret);
+    }
+
+    const expandedSecret = await getSecretByNameV2({
+      environmentSlug: seedData1.environment.slug,
+      workspaceId: projectId,
+      secretPath: "/",
+      authToken: jwtAuthToken,
+      key: "TEST"
+    });
+    // eslint-disable-next-line
+    expect(expandedSecret.secretValue).toBe("hello ${NON_EXISTENT_SECRET}");
+
+    const listSecrets = await getSecretsV2({
+      environmentSlug: seedData1.environment.slug,
+      workspaceId: projectId,
+      secretPath: "/",
+      authToken: jwtAuthToken
+    });
+    expect(listSecrets.secrets).toEqual(
+      expect.arrayContaining([
+        expect.objectContaining({
+          secretKey: "TEST",
+          // eslint-disable-next-line
+          secretValue: "hello ${NON_EXISTENT_SECRET}"
+        })
+      ])
+    );
+
+    await Promise.all(secrets.map((el) => deleteSecretV2(el)));
+  });
+
+  test("Local secret reference with repeated non-existent secret keeps literal references", async () => {
+    const secrets = [
+      {
+        environmentSlug: seedData1.environment.slug,
+        workspaceId: projectId,
+        secretPath: "/",
+        authToken: jwtAuthToken,
+        key: "TEST",
+        // eslint-disable-next-line
+        value: "${MISSING} ${MISSING}"
+      }
+    ];
+
+    for (const secret of secrets) {
+      // eslint-disable-next-line no-await-in-loop
+      await createSecretV2(secret);
+    }
+
+    const expandedSecret = await getSecretByNameV2({
+      environmentSlug: seedData1.environment.slug,
+      workspaceId: projectId,
+      secretPath: "/",
+      authToken: jwtAuthToken,
+      key: "TEST"
+    });
+    // eslint-disable-next-line
+    expect(expandedSecret.secretValue).toBe("${MISSING} ${MISSING}");
+
+    const listSecrets = await getSecretsV2({
+      environmentSlug: seedData1.environment.slug,
+      workspaceId: projectId,
+      secretPath: "/",
+      authToken: jwtAuthToken
+    });
+    expect(listSecrets.secrets).toEqual(
+      expect.arrayContaining([
+        expect.objectContaining({
+          secretKey: "TEST",
+          // eslint-disable-next-line
+          secretValue: "${MISSING} ${MISSING}"
+        })
+      ])
+    );
+
+    await Promise.all(secrets.map((el) => deleteSecretV2(el)));
+  });
+
   test("Cross environment secret reference", async () => {
     const secrets = [
       {
diff --git a/backend/src/services/secret-v2-bridge/secret-reference-fns.ts b/backend/src/services/secret-v2-bridge/secret-reference-fns.ts
index 332db86ee3a..35c56333170 100644
--- a/backend/src/services/secret-v2-bridge/secret-reference-fns.ts
+++ b/backend/src/services/secret-v2-bridge/secret-reference-fns.ts
@@ -87,45 +87,57 @@ export const expandSecretReferencesFactory = ({
   canExpandValue,
   userId
 }: TInterpolateSecretArg) => {
-  const secretCache: Record<string, Record<string, { value: string; tags: string[] }>> = {};
+  const secretCache: Record<string, Record<string, { value: string; tags: string[]; exists: boolean }>> = {};
   const getCacheUniqueKey = (environment: string, secretPath: string) => `${environment}-${secretPath}`;
 
-  const fetchSecret = async (environment: string, secretPath: string, secretKey: string) => {
+  const fetchSecret = async (
+    environment: string,
+    secretPath: string,
+    secretKey: string
+  ): Promise<{ value: string; tags: string[]; exists: boolean }> => {
     const cacheKey = getCacheUniqueKey(environment, secretPath);
 
     if (secretCache?.[cacheKey]) {
-      return secretCache[cacheKey][secretKey] || { value: "", tags: [] };
+      const cachedSecret = secretCache[cacheKey][secretKey];
+      if (cachedSecret) return { ...cachedSecret };
+      return { value: "", tags: [], exists: false };
     }
 
     try {
       const folder = await folderDAL.findBySecretPath(projectId, environment, secretPath);
-      if (!folder) return { value: "", tags: [] };
+      if (!folder) return { value: "", tags: [], exists: false };
       // When userId is provided, findByFolderId returns both shared and personal secrets.
       // Personal overrides will take precedence over shared secrets in the reduce below.
       const secrets = await secretDAL.findByFolderId({ folderId: folder.id, userId });
 
-      const decryptedSecret = secrets.reduce<Record<string, { value: string; tags: string[] }>>((prev, secret) => {
-        // When userId is set, personal overrides (userId !== null) should take precedence
-        // over shared secrets for the same key. We skip overwriting if a personal override
-        // is already stored and the current secret is a shared one.
-        if (userId && prev[secret.key] && !secret.userId) {
-          return prev;
-        }
+      const decryptedSecret = secrets.reduce<Record<string, { value: string; tags: string[]; exists: boolean }>>(
+        (prev, secret) => {
+          // When userId is set, personal overrides (userId !== null) should take precedence
+          // over shared secrets for the same key. We skip overwriting if a personal override
+          // is already stored and the current secret is a shared one.
+          if (userId && prev[secret.key] && !secret.userId) {
+            return prev;
+          }
 
-        // eslint-disable-next-line no-param-reassign
-        prev[secret.key] = {
-          value: decryptSecret(secret.encryptedValue) || "",
-          tags: secret.tags?.map((el) => el.slug)
-        };
-        return prev;
-      }, {});
+          // eslint-disable-next-line no-param-reassign
+          prev[secret.key] = {
+            value: decryptSecret(secret.encryptedValue) || "",
+            tags: secret.tags?.map((el) => el.slug),
+            exists: true
+          };
+          return prev;
+        },
+        {}
+      );
 
       secretCache[cacheKey] = decryptedSecret;
 
-      return secretCache[cacheKey][secretKey] || { value: "", tags: [] };
+      const fetchedSecret = secretCache[cacheKey][secretKey];
+      if (fetchedSecret) return { ...fetchedSecret };
+      return { value: "", tags: [], exists: false };
     } catch (error) {
       secretCache[cacheKey] = {};
-      return { value: "", tags: [] };
+      return { value: "", tags: [], exists: false };
     }
   };
 
@@ -174,6 +186,7 @@ export const expandSecretReferencesFactory = ({
           let referencedSecretKey = "";
           let referencedSecretEnvironmentSlug = "";
           let referencedSecretValue = "";
+          let referencedSecretExists = false;
 
           if (entities.length === 1) {
             const [secretKey] = entities;
@@ -190,6 +203,7 @@ export const expandSecretReferencesFactory = ({
             secretCache[cacheKey][secretKey] = referredValue;
 
             referencedSecretValue = referredValue.value;
+            referencedSecretExists = referredValue.exists;
             referencedSecretKey = secretKey;
             referencedSecretPath = secretPath;
             referencedSecretEnvironmentSlug = environment;
@@ -210,6 +224,7 @@ export const expandSecretReferencesFactory = ({
             secretCache[cacheKey][secretReferenceKey] = referedValue;
 
             referencedSecretValue = referedValue.value;
+            referencedSecretExists = referedValue.exists;
             referencedSecretKey = secretReferenceKey;
             referencedSecretPath = secretReferencePath;
             referencedSecretEnvironmentSlug = secretReferenceEnvironment;
@@ -247,10 +262,13 @@ export const expandSecretReferencesFactory = ({
             stack.push({ ...node, visitedSecrets: newVisitedSecrets });
           }
 
-          expandedValue = expandedValue.replaceAll(
-            interpolationSyntax,
-            () => referencedSecretValue // prevents special characters from triggering replacement patterns
-          );
+          if (referencedSecretExists) {
+            expandedValue = expandedValue.replaceAll(
+              interpolationSyntax,
+              () => referencedSecretValue // prevents special characters from triggering replacement patterns
+            );
+          }
+          // when the referenced secret does not exist, leave the literal ${REF} untouched
         }
       }
     }