The index file keeps track of which objects are currently checked out in the working directory, and the last modified time of those working files. Changes in the working directory can be detected by comparing the modification times to the cached modification time within the index file.
Index files are also used during merges, where the merge happens within the index file first, and the working directory is updated as a post-merge step. Conflicts are stored in the index file to allow tool (and human) based resolutions to be easily performed.
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