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 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.