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We consider dynamics of a Rydberg impurity in a cloud of ultracold bosonic atoms in which the Rydberg electron can undergo spin-changing collisions with surrounding atoms. This system realizes a new type of the quantum impurity problem that compounds essential features of the Kondo model, the Bose polaron, and the central spin model. To capture the interplay of the Rydberg-electron spin dynamics and the orbital motion of atoms, we employ a new variational method that combines an impurity-decoupling transformation with a Gaussian ansatz for the bath particles. We find several unexpected features of this model that are not present in traditional impurity problems, including interaction-induced renormalization of the absorption spectrum that eludes simple explanations from molecular bound states, and long-lasting oscillations of the Rydberg-electron spin. We discuss generalizations of our analysis to other systems in atomic physics and quantum chemistry, where an electron excitation of high orbital quantum number interacts with a spinful quantum bath.