Polymeric hydrogels and microparticles have been widely used for localized drug delivery applications for the treatment of arthritis. Nonetheless, owing to initial burst drug release, non-specific biodistribution and low retention time at the target site in body, these polymeric drug delivery systems have been found with low in-vivo performance. Hence, the above limitations need to be resolved by designing a smart novel drug delivery system which is the current need in biomedicine. Herein, a novel localized injectable thermoresponsive microparticles embedded hydrogel composite drug delivery system has been developed for the treatment of inflammatory arthritis. In the current study, methotrexate (MTX) loaded alginate microparticles (MTX-Microparticles) are embedded into thermoreversible hydrogel matrix (MTX-MPs-H) prepared by physical blending of sodium hyaluronate and methylcellulose (SHMC). Microparticles-hydrogel composite system exhibited appropriate in-vitro thermoreversibility (sol at 4 °C and gel at 37 °C), biocompatibility (>80 %), hemocompatibility, and controlled drug release profile. The in-vivo biocompatibility studies for 10 days revealed that composite system is non-toxic in nature. The developed MTX-MPs-H composite drug delivery system effectively decreased the swelling/ inflammation of the arthritis affected paw in wistar rats in comparison to only alginate microparticles and pure MTX up to 30 days.