Cancelling hotel after getting a visa?

In this case the German consulate is right.

You wrote that you are a doctoral student in Germany, meaning that you have not acquired permanent residence there. But the Verpflichtungserklärung is intended for permanent residents and citizens only. It means you do not have the standing to use that form of assurance.

benötigt Ihr Gast in der Regel eine Verpflichtungserklärung eines Gastgebers, der seinen ständigen Wohnsitz in der Bundesrepublik Deutschland hat.

(emphasis mine) Source: https://service.berlin.de/dienstleistung/120691/

or roughly...

...your guest needs a 'commitment explanation' (liability undertaking) from the hosts, he who possesses permanent residence in the Federal Republic of Germany'

You can make a hotel confirmation and send it to support the application. If you later cancel the reservation that's fine as long as your parents have something to show for their NEXT visa application.

Short answer: give them what they ask for.

Adding: please see http://www.linguee.de/deutsch-englisch/uebersetzung/st%C3%A4ndiger+wohnsitz.html for more.

"This invitation clearly states that they will be accommodated at my apartment (a studentwohnheim - student apartment) which is big enough for all of us."

I must correct you.
A student apartment in Germany has normally something like 10-20 square meters which is not sufficient for three people. While it may be spacious enough for India, in Germany the rule of thumb is 1 room for 1 person. And a student apartment has a shared bathroom and kitchen, so other roommates will inevitably notice your parents. Worse of all, this is not your apartment, you got the room only by accepting the rules of the Wohnheim.

Practically students will be light-hearted and normally you will have no problems that your parents are visiting you, but you put yourself at risk if you continue your approach. I have sometimes the feeling that foreign students do not take German bureaucracy seriously until it is too late. Remember: They can kick you out anytime without paying attention how much trouble it causes you.

So the German Consulate is quite correct, you may not offer your room to your parents. I also think you were careless: As already noticed by Gayot Fow you are not able to use a Verpflichtungserklärung (which they probably see as inexperience).

So pay the hotel rooms (if you cannot, there is a good reason for the Consulate to deny the visit. Papers, flight tickets and money can be stolen and if you are not able to handle this, your parents should not have visited you in the first place).

According to the German law (§ 68 AufenthG), you do not need an "official invitation letter from the Ausländerbehörde" (the law says that you need an 'Verpflichtungserklärung', but it does not say that it should be approved by Ausländerbehörde). You could write 'Verpflichtungserklärung' by yourself, just by hand. I also do not think, that German Consulate in India is right about it, however, they could have some internal country-specific rules.

EDIT: From my experience, German Consulate is not completely right, or you just do not know their reasoning. It makes no sense for them to ask for hotel, since the accomodation will be at your apartments. However, I'm not sure if your should push them, maybe the hotel will be an easier way...

If you will decide to push them, this could be a useful link:

http://www.mth-partner.de/auslaenderrecht-anwalt/auslanderrecht-rechtsbehelfe-gegen-ablehnenden-bescheid-der-botschaft-remonstration-und-klage/

http://www.anwalt.de/rechtstipps/visum-abgelehnt-was-tun_016432.html

However, probably, you first need to get a "decline" from the consulate to write a complaint on it. So your parents will not get to Germany so fast in this case.

What I would try to do, just call the consulate and talk with them about the situation. Or directly ask for the phone appointment with the embassador. Usually, an embassador is obliged to have some time for conversations with "usual" people.

2 more things to consider:

1. For the formal Verpflichtungserklärung, there could be also different text in it. Depending on the State of Germany where you live and your financial status, it could be written there, that your financial status is not proven/enough and so on. In this case the people you invite should show that they have enough money for the trip.

2. Maybe your appartaments are too small (12 square meters per person, http://www.ailebirlesimi.de/html/ehegatten_von_auslaendern_in_deutschland.html?t=)

I tried once to invite family members with an Invitation + "Verpflichtungserklaerung" and the visa was denied (sorry don't remember the exact reason).

Instead my family members applied for a "Tourist Visa". Here they had to get a Hotel reservation. I got a booking.com Reservation with "Free Cancellation" and canceled the reservation after the Visa was granted.

My family members reported that when applying for tourist visa the process was a lot easier and the interviewer at the consulate were less suspicious and more friendly.

So if the financial situation of your family allows applying for a tourist visa I suggest taking that route.