In this study, we have explored the slow (of the order of several hundreds of picoseconds) relaxation dynamics of water associated with the hydration shell of a biocompatible polymer, hydroxypropyl cellulose (HPC)-water mixture as a function of HPC concentration using time-resolved fluorescence spectroscopy. The relaxation dynamics slows down with a progressive increase in HPC content indicating restriction of the relaxation pathway of water molecules specially beyond a cellulose concentration of 20% wherein an isotropic to liquid crystalline cholesteric microscopic phase separation sets in. The activation energy calculated from the temperature dependent solvation dynamics studies also shows a similar trend. The nucleophilic activity of water molecules in these mixtures is determined by measuring the reaction kinetics of solvolysis of benzoyl chloride, and the reaction rate exhibits a marked decrease as the phase separation sets in. The observed results are correlated with a transition between the ‘bulk’ and ‘bound’ type of water molecules present in the system.