The Index input is where Mach looks to see what the spindle speed is, ie 1 pulse per rev so it can work out what the RPM is.
There is a setting which can affect that, it is the ratio in Pulley Setp page, if you have a ratio of 1 then each pulse is one rev, if however you had the sensor on the motor and there was gearing between the spindle and motor then you would set a ratio so Mach can work out the amount of pulses it sees before it calls it a rev.
The index is used for readout and if you are in Feed Per Rev mode (G95)
It is not used to correct spindle speed unless you have closed loop spindle control selected but not sure how well that works, have heard reports from some people have said it doesnt. I have never used it as my spindles are step/dir servos.
Hood