Hotel reservations

First of all, if you are at all unsure about the status of your visa, I would make only reservations that allow for cancellation and full refund.

Secondly, you do not mention what country you are from, only that you are going to Italy. Your very best source of information on visa requirements will the Italian Embassy or Consulate in your country. They usually have a fairly easy to manage website with a great deal of information on it.

I am from India. Along with 7 days in italy I will be travelling to Austria for 4 days and 2 days in czech from where I have my return flight back to India. I mainly want to know about the dummy hotel booking. Is it reliable in case I want to make the reservations after clearing the visa formalities

Not sure what you mean by a dummy reservation. Either you make a reservation or not. When you make it there will be terms attached to the reservation. Just make sure you have the right to cancel and the time frame for the cancellation.

Exactly. Even I am equally confused. There are sites which claim to provide hotel reservations on payment of around 30-40 $ per person. But I am not sure about the authenticity of these. Please help

I am guessing that you must have a destination address (i.e., hotel) in order to apply for a visa. Is that correct?

https://www.schengenvisainfo.com/schengen-visa-application-requirements/proof-accommodation/

This site indicates that hotel booking or reservation is required. What should I do?

If the official Schengen and Italian visa rules require a hotel booking then you should book a hotel. If you think you may change your mind on where you want to stay then you should make sure that the hotel you book will refund most if not all of your money. The hotel website should provide its cancellation policy. If $30-$40 is non-refundable and that is unacceptable to you then find a different hotel. If the $30-$40 non-refundable deposit is because you are using a third party service, book directly with the hotel after checking its cancellation policy.

There are sites which claim to provide hotel reservations on payment
of around 30-40 $ per person. But I am not sure about the authenticity
of these

No idea what sites you're looking at but booking.com usually allows you to reserve rooms at either non-refundable price or for free cancellation price. Free cancellation rates are higher per night than non-refundable rates but what I always choose when making reservations well in advance of a trip.

You do need to read the fine print as the last day you are allowed to cancel for free can be different for each hotel.

Since they asking for reservations for the whole duration of your stay, they're pretty much requiring you to plan the trip first, but it sounds like you do know pretty well where you want to go. So maybe you need 3 or 4 hotel reservations, all refundable within a reasonable window of time, either through booking.com or directly on a hotel web site. Hopefully you have no issues getting credit card approval. Many people prefer to book ahead, any way.