The file does what you've been told it does, by design, and it's a concern for many users. See this link for info about a tool to remove this file and related info:
Free History Eraser
This file (index.dat) is used by the caching system that IE uses to maintain the internet files that are downloaded to your system for viewing. I have my system setup so that this file's folder is purged whenever the browser is closed.
I do this not so much for the privacy issue but as a way to keep the cache clean since many problems in IE are due to corrupted files in this cache. That's why there's a feature in IE that allows the user to purge these files (but the index.dat file is not deleted).
Hope this helps.
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