Domestic travel drives India’s hotel boom; occupancies and room rates seen holding firm in FY26

India’s hospitality sector is entering a structurally stronger phase, driven overwhelmingly by domestic travel demand. Unlike the pre-Covid period, when foreign tourist arrivals and international business travel played an outsized role, the current growth cycle is being fuelled by Indian travellers - families, corporates, wedding groups and event organisers - who are travelling more frequently, spending more per trip and exploring a wider range of destinations. This shift, according to a new assessment by , has made the sector less vulnerable to external shocks and better positioned for sustained growth in the coming years.

The ratings agency expects hotel industry revenues to continue rising in FY26 despite a strong base in FY25, supported by healthy demand across leisure travel, meetings, incentives, conferences and events (MICE), destination weddings and a steady recovery in business travel. With supply additions still lagging demand in most key markets, pricing power remains intact - a trend that is now reshaping how hotel companies plan expansion, manage capital and design their operating models.

ICRA expects pan-India premium hotel occupancy to remain in the range of 72 to 74 per cent in FY26, a level that reflects both sustained demand and disciplined supply growth.

Supply growth continues to trail demand

Despite rising room rates and occupancies, supply additions across the country remain measured. High land costs, longer project gestation periods and tighter financing conditions have slowed large-scale greenfield development, particularly in urban centres. As a result, demand growth continues to outpace new supply, strengthening pricing power for existing operators.

Budget expectations and policy support

The ratings agency expects the upcoming Union Budget to continue its focus on tourism and infrastructure development, ease of doing business and enhanced connectivity. Investments in highways, airports and regional transport networks have already made it easier to reach tier-II and tier-III destinations, expanding the market for hotels beyond major cities. Better connectivity has helped drive leisure travel and has also made smaller cities attractive venues for conferences, weddings and corporate events, widening the demand base.

Industry executives say continued policy support will be important to ensure that new hotel supply keeps pace with long-term demand without hurting profitability. The report also points to a clear shift in how hotel companies are choosing to grow. Instead of owning properties, many operators are increasingly opting for management contracts and franchise models. These asset-light approaches bring in fee-based income, require far less capital and help improve cash flows and returns. According to Sruthi Thomas, Vice President and Sector Head, Corporate Ratings at ICRA, the market today can support a wide range of formats and price points. As a result, hotel companies are moving beyond the traditional upscale business hotel, allowing them to expand faster, enter new markets and respond to changing traveller preferences without putting pressure on their balance sheets.