Indian hospitality industry is booming with growing demand and favorable trends, ETTravelWorld

Srikumar Krishnamurthy

The Indian hospitality industry continues to enjoy a successful run with the growth momentum of the last three years continuing into FY2026 as well as amid persistent supply-demand imbalances. Positive sentiment toward domestic travel, holiday-led leisure demand, higher corporate traffic, and slower pace of supply additions all position the industry well.

Occupancy and ARRs are at decade highs
The recovery of the Indian hospitality sector is strongly supported by data. According to ICRA, occupancy rates of premium hotels across India and average room rates (ARRs) are estimated at 66-68% and Rs. 7,900-8,000 respectively for 7 months of FY26, compared to 67-69% and Rs. 7,600-7,800 in the seven months of FY2025. This follows a strong performance in the second quarter of FY2025, driven by business travel, MICE activity and leisure demand.

Looking ahead, we expect a significant jump, with premium hotel occupancy expected to reach 72-74% in FY2026, up from 70-72% in the previous two financial years. ARRs are also expected to rise to Rs. 8,200-8,500. Hence, the important RevPAR metric is expected to rise to Rs. 5,900-6,300, supported by these continued healthy occupancy and pricing trends.

Elastic demand across markets, with a focus on tier 2 markets
Key markets like Mumbai, New Delhi, Gurugram, etc. are witnessing resilient demand and high occupancy rates, supported by a mix of corporate events, weddings and international expatriates. Cities like Bengaluru and Hyderabad are seeing steady improvement as business and consulting travel rebounds, while leisure destinations like Goa have seen strong footfall in the last couple of months. Tier 2 markets are witnessing a structural rise, driven by airport expansions, highway connectivity, and domestic tourism.

While heavy rains in certain parts of India affected travel temporarily, the impact was localized and occupancy rebounded quickly. Sentiments recovered from temporary travel disruptions due to terrorist attacks and geopolitical developments last quarter.

Cumulative air traffic in Tier II cities witnessed a CAGR of 10% between FY16 and FY2025, which was significantly higher than the CAGR of 7% witnessed by the top six cities during the same period. The healthy flow of traffic to tier-II cities augurs well for the demand for hotels in smaller towns. On the pricing front, permanent stay rates in Mumbai and NCR are gaining traction from transit, business and MICE travellers. Upgrading properties also facilitates a higher rate of return on prices at specific hotels. Average annual returns have trended toward the FY08 peak in most markets in FY2025 and are likely to rise further in FY2026.

Healthy ARRs at premium hotels will continue to cause demand to spread to mid-sized hotels. While the Indian company’s performance has been steady, business travel sentiment is at risk of turning cautious as export-oriented sectors face some challenges following US tariff-related developments.

Domestic travel support that continues to guide the recovery path, and demand from meetings, incentives, conferences and exhibitions, including weddings and business travel (despite a temporary lull during the election period), are likely to boost demand in FY2025. Spiritual tourism and tier-II cities are also expected to contribute actively in FY2025, according to ICRA forecasts.

GST rationalization adds cheer to the festive season
The inherently strong period from October to December is expected to add a boost to the hotel industry’s performance supported by strong demand for holidays, family leisure travel, weddings, cultural tourism etc. Progressively, rationalization of GST rates from 12% (with ITC) to 5% (without ITC) for room rates below Rs. 7,500 as of September 22, 2025 will support the budget and mid-range hotel sectors in this critical period. While the non-availability of Input Tax Credit (ITC) is expected to increase costs to some extent, the industry is likely to be supported by the expected improvement in occupancy rates, lower input costs due to GST cuts, and higher disposable income among the public.

Overall, this is a win-win for both customers and budget hotels. Apart from this, the reduction in income tax rates and interest rate by the Reserve Bank of India, followed by reduction in GST on various goods and services, is expected to improve disposable income, travel sentiment and demand for the hospitality sector.

Supply growth continues to lag behind demand
To meet sustained demand growth, the industry is witnessing the next wave of expansion with almost all major players announcing additions in supply. Most of the expansion is done through asset-light placement in tier 2/3 cities where land availability in major metros is a challenge. ICRA’s premium room inventory database (12 major cities) across the country indicates a CAGR of around 5.0-6.0% over FY2025-FY2028. Although display advertising has picked up in the last 24-30 months, supply will still lag behind demand over the next few years, based on the pipeline so far.

Compared to the previous down cycle in FY09, which saw off-time supply increases of more than 15% of inventory at the bottom of the cycle during FY09-FY13, current inventory growth is 5-6% for FY2025-2028. This is expected to facilitate an upward cycle as demand improves and supply lags behind demand due to hoteliers’ cautious expansion approach and the absence of any major announcements during the Covid-19 period.

Also, in the previous down cycle, supply addition was largely focused on Tier 1/metro cities, however, supply is currently spread across Tier 2/3 markets as well as airport hotels and religious destinations, which are expected to support demand in the medium term without any excess supply.

The author is Senior Vice President and Group Co-Head, Corporate Ratings, ICRA Limited

Disclaimer: The opinions expressed are solely those of the author and are not necessarily endorsed by ETTravelWorld.com. ETTravelWorld.com will not be responsible for any damage caused to any person/organization directly or indirectly.

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