A senior police officer said a four kg IED was planted near a wine shop inside a hotel complex on Boulevard Road, which is thronged by thousands of tourists.
The police and paramilitary troops immediately surrounded the area and people were asked to move away from the spot. The IED, the officer said had been kept in a steel container and concealed in a bag.
Members of the police bomb disposal squad were rushed to the hotel complex to defuse the powerful IED, where they conducted a controlled explosion. Windowpanes of the hotel broke because of the police exercise, witnesses said.
Following Thursday's incident security in the area was beefed up.