diff --git a/controllers/classifier_deployer.go b/controllers/classifier_deployer.go
index b1885dd..e614973 100644
--- a/controllers/classifier_deployer.go
+++ b/controllers/classifier_deployer.go
@@ -1682,12 +1682,13 @@ func prepareSveltosAgentYAML(agentYAML, clusterNamespace, clusterName, mode stri
 }
 
 func prepareSveltosApplierYAML(agentYAML, clusterNamespace, clusterName string,
-	clusterType libsveltosv1beta1.ClusterType) string {
+	clusterType libsveltosv1beta1.ClusterType, watchNamespaces []string) string {
 
 	agentYAML = strings.ReplaceAll(agentYAML, "cluster-namespace=", fmt.Sprintf("cluster-namespace=%s", clusterNamespace))
 	agentYAML = strings.ReplaceAll(agentYAML, "cluster-name=", fmt.Sprintf("cluster-name=%s", clusterName))
 	agentYAML = strings.ReplaceAll(agentYAML, "cluster-type=", fmt.Sprintf("cluster-type=%s", clusterType))
 	agentYAML = strings.ReplaceAll(agentYAML, "secret-with-kubeconfig=", fmt.Sprintf("secret-with-kubeconfig=%s-sveltos-kubeconfig", clusterName))
+	agentYAML = strings.ReplaceAll(agentYAML, "watch-namespaces=", fmt.Sprintf("watch-namespaces=%s", strings.Join(watchNamespaces, ",")))
 
 	registry := getSveltosAgentRegistry()
 	if registry != "" {
@@ -1805,8 +1806,14 @@ func upgradeSveltosApplierInManagedCluster(ctx context.Context, clusterNamespace
 		return err
 	}
 
+	watchNamespaces, err := getAgentWatchNamespaces(ctx, getManagementClusterClient(),
+		clusterNamespace, clusterName, clusterType, logger)
+	if err != nil {
+		return err
+	}
+
 	agentYAML := string(agent.GetSveltosApplierAML())
-	agentYAML = prepareSveltosApplierYAML(agentYAML, clusterNamespace, clusterName, clusterType)
+	agentYAML = prepareSveltosApplierYAML(agentYAML, clusterNamespace, clusterName, clusterType, watchNamespaces)
 
 	return deploySveltosApplierResources(ctx, clusterNamespace, clusterName, classifierName,
 		agentYAML, patches, logger)
diff --git a/controllers/classifier_deployer_test.go b/controllers/classifier_deployer_test.go
index 12c618f..8b9de20 100644
--- a/controllers/classifier_deployer_test.go
+++ b/controllers/classifier_deployer_test.go
@@ -498,6 +498,34 @@ var _ = Describe("Classifier Deployer", func() {
 			ContainElement("--watch-namespaces=ns1,ns2"))
 	})
 
+	It("prepareSveltosApplierYAML relays watch-namespaces into the sveltos-applier manifest", func() {
+		agentYAML := `- --cluster-namespace=
+- --cluster-name=
+- --cluster-type=
+- --secret-with-kubeconfig=
+- --watch-namespaces=`
+
+		clusterNamespace := randomString()
+		clusterName := randomString()
+		watchNamespaces := []string{watchNamespaceNs1, watchNamespaceNs2}
+
+		result := controllers.PrepareSveltosApplierYAML(agentYAML, clusterNamespace, clusterName,
+			libsveltosv1beta1.ClusterTypeCapi, watchNamespaces)
+
+		Expect(result).To(ContainSubstring("--watch-namespaces=ns1,ns2"))
+		Expect(result).To(ContainSubstring(fmt.Sprintf("--cluster-namespace=%s", clusterNamespace)))
+		Expect(result).To(ContainSubstring(fmt.Sprintf("--cluster-name=%s", clusterName)))
+	})
+
+	It("prepareSveltosApplierYAML leaves watch-namespaces empty when no namespaces are configured", func() {
+		agentYAML := `- --watch-namespaces=`
+
+		result := controllers.PrepareSveltosApplierYAML(agentYAML, randomString(), randomString(),
+			libsveltosv1beta1.ClusterTypeCapi, nil)
+
+		Expect(result).To(Equal(agentYAML))
+	})
+
 	It("createAccessRequest creates AccessRequest instance", func() {
 		classifier := getClassifierInstance(randomString())
 
diff --git a/controllers/export_test.go b/controllers/export_test.go
index cc6d08d..1b358b4 100644
--- a/controllers/export_test.go
+++ b/controllers/export_test.go
@@ -50,6 +50,7 @@ var (
 	DeployDebuggingConfigurationCRD                   = deployDebuggingConfigurationCRD
 	DeployClassifierInstance                          = deployClassifierInstance
 	DeploySveltosAgentInManagedCluster                = deploySveltosAgentInManagedCluster
+	PrepareSveltosApplierYAML                         = prepareSveltosApplierYAML
 	ClassifierHash                                    = classifierHash
 	DeployClassifierInCluster                         = deployClassifierInCluster
 	UndeployClassifierFromCluster                     = undeployClassifierFromCluster
diff --git a/pkg/agent/sveltos-applier.go b/pkg/agent/sveltos-applier.go
index d3f0c90..a5ef1a7 100644
--- a/pkg/agent/sveltos-applier.go
+++ b/pkg/agent/sveltos-applier.go
@@ -100,6 +100,7 @@ spec:
         - --cluster-name=
         - --cluster-type=
         - --secret-with-kubeconfig=
+        - --watch-namespaces=
         - --v=5
         - --version=main
         command:
@@ -117,7 +118,7 @@ spec:
           valueFrom:
             fieldRef:
               fieldPath: metadata.namespace
-        image: docker.io/projectsveltos/sveltos-applier@sha256:747f74958b935737a023e10871c7b97b81eb2c3c96cebeee5b3d679410de625d
+        image: docker.io/projectsveltos/sveltos-applier@sha256:6bea4f06b8d1d3fa988b018045727c715fce63d3d46b143e6b392aefc062e828
         livenessProbe:
           failureThreshold: 3
           httpGet:
diff --git a/pkg/agent/sveltos-applier.yaml b/pkg/agent/sveltos-applier.yaml
index 9dc2809..e9e143d 100644
--- a/pkg/agent/sveltos-applier.yaml
+++ b/pkg/agent/sveltos-applier.yaml
@@ -82,6 +82,7 @@ spec:
         - --cluster-name=
         - --cluster-type=
         - --secret-with-kubeconfig=
+        - --watch-namespaces=
         - --v=5
         - --version=main
         command:
@@ -99,7 +100,7 @@ spec:
           valueFrom:
             fieldRef:
               fieldPath: metadata.namespace
-        image: docker.io/projectsveltos/sveltos-applier@sha256:747f74958b935737a023e10871c7b97b81eb2c3c96cebeee5b3d679410de625d
+        image: docker.io/projectsveltos/sveltos-applier@sha256:6bea4f06b8d1d3fa988b018045727c715fce63d3d46b143e6b392aefc062e828
         livenessProbe:
           failureThreshold: 3
           httpGet:
diff --git a/test/pullmode-sveltosapplier.yaml b/test/pullmode-sveltosapplier.yaml
index 4650780..aa61488 100644
--- a/test/pullmode-sveltosapplier.yaml
+++ b/test/pullmode-sveltosapplier.yaml
@@ -82,6 +82,7 @@ spec:
         - --cluster-name=clusterapi-workload
         - --cluster-type=sveltos
         - --secret-with-kubeconfig=clusterapi-workload-sveltos-kubeconfig
+        - --watch-namespaces=
         - --v=5
         - --version=main
         command:
@@ -99,7 +100,7 @@ spec:
           valueFrom:
             fieldRef:
               fieldPath: metadata.namespace
-        image: docker.io/projectsveltos/sveltos-applier@sha256:747f74958b935737a023e10871c7b97b81eb2c3c96cebeee5b3d679410de625d
+        image: docker.io/projectsveltos/sveltos-applier@sha256:6bea4f06b8d1d3fa988b018045727c715fce63d3d46b143e6b392aefc062e828
         livenessProbe:
           failureThreshold: 3
           httpGet: