According to my tests, as of v0.46.11, Cursor does not activate project rules which are stored in sub-directories of the .cursor/rules/ location. See codekiln/cursor-project-rule-test: Testing the Cursor Project Rule feature for an independent repository you can clone and test.
If Cursor did, then we would be able to use Git Submodules to reference Cursor Project Rules stored in a centralized repository, shared among many users and projects. This would unlock a whole new way to share project rules between users and repositories. In my opinion, it’s very important that Cursor enable its community to collaborate together on developing mature, open source cursor rules, and adding this feature would be an important step in that direction.
A number of users in the community have been interested in this functionality; see Mastering Cursor Rules: A Developer’s Guide to Smart AI Integration - DEV Community for an example.
An example of the type of repo that could be pulled in by multiple repositories is GitHub - codekiln/cursor-ai-sdlc: Cursor rules for the phases and stages of the Software Development Life Cycle (SDLC), which proposes a way to use a particular directory to be a bridge between external tools like JIRA and the SDLC.
I’ve listed a number of dynamics and workarounds at CursorAI/How To/Share Cursor Project Rules Across Repositories and Users.