It implies a feeling of distrust or suspicion, often based on intuition or circumstantial evidence.
For example:
* "I told her I'd be back in an hour, but she kept checking her watch. I could tell she smelled a rat."
* "The deal seemed too good to be true, and I started to smell a rat."
The origin of the idiom is unknown, but it is thought to have originated in the 16th century. One theory suggests that rats were associated with disease and decay, and smelling one might have been a sign of something sinister.