diff --git a/pkg/engine/api/context.go b/pkg/engine/api/context.go
index 0091ad8c8c..e45aa5dd24 100644
--- a/pkg/engine/api/context.go
+++ b/pkg/engine/api/context.go
@@ -27,6 +27,7 @@ func LoadVariable(logger logr.Logger, jp jmespath.Interface, entry kyvernov1.Con
 		logger.V(4).Info("evaluated jmespath", "variable name", entry.Name, "jmespath", path)
 	}
 	var defaultValue interface{} = nil
+
 	if entry.Variable.Default != nil {
 		value, err := variables.DocumentToUntyped(entry.Variable.Default)
 		if err != nil {
@@ -58,7 +59,9 @@ func LoadVariable(logger logr.Logger, jp jmespath.Interface, entry kyvernov1.Con
 	} else {
 		if path != "" {
 			if variable, err := ctx.Query(path); err == nil {
-				output = variable
+				if variable != nil {
+					output = variable
+				}
 			} else if defaultValue == nil {
 				return fmt.Errorf("failed to apply jmespath %s to variable %v", path, err)
 			}
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/00-policy.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/00-policy.yaml
new file mode 100644
index 0000000000..b20ef0bd7d
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/00-policy.yaml
@@ -0,0 +1,6 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- policy.yaml
+assert:
+- policy-assert.yaml
\ No newline at end of file
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/01-pod.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/01-pod.yaml
new file mode 100644
index 0000000000..9cd8cc3c1b
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/01-pod.yaml
@@ -0,0 +1,7 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- file: pod.yaml
+  shouldFail: false
+assert:
+- pod-assert.yaml
\ No newline at end of file
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/README.md b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/README.md
new file mode 100644
index 0000000000..71a15821b2
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/README.md
@@ -0,0 +1,11 @@
+## Description
+
+This test checks that the `default` field in a context variable should replace nil results in mutateExisting policies.
+
+## Expected Behavior
+
+With the mutateExisting policy, the context variable `podName` will assume the value of `empty` since there is no pod whose name is starting with `good-`, and the pod should get created as preconditions matching as the value of the variable is set to default which is `empty` is equal to  `empty`.
+
+## Reference Issue(s)
+
+https://github.com/kyverno/kyverno/issues/7148
\ No newline at end of file
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod-assert.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod-assert.yaml
new file mode 100644
index 0000000000..878c824de5
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod-assert.yaml
@@ -0,0 +1,12 @@
+apiVersion: v1
+kind: Pod
+metadata:
+  name: 'bad-box'
+  labels:
+    foo: bar
+spec:
+  automountServiceAccountToken: false
+  containers:
+  - name: busybox
+    image: busybox:latest
+    command: ["sleep", "9999"]
\ No newline at end of file
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod.yaml
new file mode 100644
index 0000000000..524dde67e6
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/pod.yaml
@@ -0,0 +1,11 @@
+apiVersion: v1
+kind: Pod
+metadata:
+  name: 'bad-box'
+spec:
+  automountServiceAccountToken: false
+  containers:
+  - name: busybox
+    image: busybox:latest
+    command: ["sleep", "9999"]
+
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy-assert.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy-assert.yaml
new file mode 100644
index 0000000000..b0bac17455
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy-assert.yaml
@@ -0,0 +1,9 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: pod-add-labels
+status:
+  conditions:
+  - reason: Succeeded
+    status: "True"
+    type: Ready
\ No newline at end of file
diff --git a/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy.yaml b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy.yaml
new file mode 100644
index 0000000000..6cf9e5ee3b
--- /dev/null
+++ b/test/conformance/kuttl/mutate/clusterpolicy/cornercases/mutate-using-default-context/policy.yaml
@@ -0,0 +1,27 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: pod-add-labels
+spec:
+  rules:
+  - name: foo
+    match:
+      any:
+      - resources:
+          kinds:
+          - Pod
+    context:
+    - name: podName
+      variable:
+        jmesPath: request.object.metadata.name[?starts_with(@, 'good-')] | [0]
+        default: empty
+    preconditions:
+     all:
+      - key: "{{podName}}"
+        operator: Equals
+        value: empty
+    mutate:
+      patchStrategicMerge:
+        metadata:
+          labels:
+            +(foo): bar
\ No newline at end of file