Domestic travel demand, policy support to drive next phase of hotel expansion: ICRA
Sruthi Thomas
“Demand drivers now include corporate travel, weddings and social events, religious and spiritual tourism, concerts, sports, MICE activities, and leisure-led travel to Tier-2 and Tier-3 cities,” said Sruthi Thomas, Vice President & Sector Head, Corporate Ratings, ICRA Limited.
ICRA expects sustained demand and pricing power to support revenue growth for the premium hotel segment in H2 FY2026 and FY2027. The revision in the Flight Duty Time Limitation (FDTL) norms led to temporary flight disruptions in early December 2025; however, the impact on hotel bookings was largely contained. Travellers extended their stays due to flight cancellations and adopted alternative modes of transport to reach destinations, while bulk bookings associated with the wedding season further helped mitigate the impact.
ICRA estimates room occupancy and average room rates (ARRs) at 69–71% and INR 8,100–8,200, respectively, in 9M FY2026, compared with 69–71% and INR 7,800–7,900 in 9M FY2025. Weddings and travel during long weekends, along with steady business travel, supported robust occupancies of 76–78% in Q3 FY2026, despite the temporary travel disruptions witnessed in early December 2025. Sentiments have since recovered from the disruptions seen earlier in the year due to terror attacks and geopolitical developments.
On the supply side, while room addition pipelines remain steady, supply growth continues to lag demand expansion, resulting in increased pricing power for hoteliers and revenue per available room reaching record highs. This persistent demand-supply imbalance has strengthened sector profitability and supports calibrated capacity addition across markets.
“The Indian hospitality market is currently exhibiting more structural growth, driven primarily by domestic travel demand, which makes the sector less exposed to global shocks than in the pre-Covid period,” shared Sruthi Thomas, Vice President & Sector Head, Corporate Ratings, ICRA Limited. Despite subdued foreign tourist arrivals, the overall demand scenario remains unaffected, with demand drivers having broadened significantly, supporting the sector’s next phase of expansion.
“Demand drivers now include corporate travel, weddings and social events, religious and spiritual tourism, concerts, sports, MICE activities, and leisure-led travel to Tier-2 and Tier-3 cities,” said Thomas, “Accordingly, the market can support multiple formats and price points, pushing hotel companies to diversify beyond the traditional upscale business hotel.”
“There is also an increasing preference towards asset-light operating models, including management contracts and franchise models, which generate fee-based, high-margin income, require minimal capital, and improve return on capital employed and free cash flows,” said Thomas.
“The improved returns with lower risks make it attractive for investors, while at the same time freeing up capital to diversify across geographies, formats and even sectors,” she further added.
On ownership strategies, Thomas said that while some hotel groups, particularly mid-sized regional players and capital-constrained entities, are rethinking their ownership philosophy given the risks of locking capital in real estate, large Indian hotel companies are unlikely to go fully asset-light.
“Owned assets continue to anchor brand prestige, with prime-city and landmark hotels creating long-term value, and control over standards still matter at the top end of the spectrum,” she said, adding that a mixed ownership strategy is emerging, with core assets retained, growth assets managed or franchised, and non-core assets monetised.
Looking ahead, ICRA expects the Indian hospitality industry’s revenues to continue to grow in FY2026, despite the high base of FY2025. Growth is likely to be supported by domestic leisure travel, demand from meetings, incentives, conferences and events, weddings and business travel. ICRA anticipates the pan-India premium hotel occupancy rate to hold at 72–74% in FY2026, broadly similar to levels seen in FY2024 and FY2025, while average room rates for premium hotels are projected to rise to INR 8,200–8,500 in FY2026, following healthy rates of INR 8,000–8,200 in FY2025.
