Mycobacterium tuberculosis (Mtb) employs multiple strategies to evade host immune responses and persist within macrophages. We have previously shown that the cell envelope-associated Mtb serine hydrolase, Hip1, prevents robust macrophage activation and dampens host pro-inflammatory responses, allowing Mtb to delay immune detection and accelerate disease progression. We now provide key mechanistic insights into the molecular and biochemical basis of Hip1 function. We establish that Hip1 is a serine protease with activity against protein and peptide substrates. Further, we show that the Mtb GroEL2 protein is a direct substrate of Hip1 protease activity. Cleavage of GroEL2 is specifically inhibited by serine protease inhibitors. We mapped the cleavage site within the N-terminus of GroEL2 and confirmed that this site is required for proteolysis of GroEL2 during Mtb growth. Interestingly, we discovered that Hip1-mediated cleavage of GroEL2 converts the protein from a multimeric to a monomeric form. Moreover, ectopic expression of cleaved GroEL2 monomers into the hip1 mutant complemented the hyperinflammatory phenotype of the hip1 mutant and restored wild type levels of cytokine responses in infected macrophages. Our studies point to Hip1-dependent proteolysis as a novel regulatory mechanism that helps Mtb respond rapidly to changing host immune environments during infection. These findings position Hip1 as an attractive target for inhibition for developing immunomodulatory therapeutics against Mtb.