In relative path mode, always add ./ in front of links for files in subdirectories relative to the current file and ../ for files in subdirectories above the current file.
This is particularly important since Obsidian doesn’t use a front / in absolute path mode and this creates confusion and ambiguity.
Maybe if this feature gets attention, the following issue will be taken care:
Obsidian has trouble creating new notes from “Relative path to file” links
Please consider also to apply this to creating new Files: base relative Links to non-existing Files to the Directory of the File they are located in as described in this issue: Obsidian has trouble creating new notes from "Relative path to file" links - #26 by SpocWeb
4 posts were split to a new topic: Better markdown links
The user @mnaoumov made a plugin that implements this FR called better markdown links.
This should not be fixed by a plugin, it should have been implemented in Obsidian from the start, since it gives rise to nasty bugs:
https://forum.obsidian.md/t/relative-path-link-points-to-a-wrong-file-with-same-file-name/41786/1