On Indian passport, Schengen Visa short term (90 days) I shall be in Spain with my host. I want to make Spain as my base to travel frequently to other Schengen Countries during this 90 days. Hence I will be travelling to and fro to Madrid. Is it allowed ? I mean to say that Madrid will be temporary home from where I can commute to other Schengen Countries for sightseeing. Does schengen airports act as domestic airports of India?
Yes -- once you're inside the Schengen area you can travel freely within the area without any visa formalities. Flights from one Schengen country to another are effectively treated as "domestic" for border control purposes, and you will not pass through border controls when boarding or disembarking such a flight.
As long as the main purpose and character of your stay matches roughly what you explained when you applied for the visa, there are no further restrictions on where you can go.
The only problem that can develop is if your plans change to the extent that your visit is not meaningfully the same visit you applied for a visa for anymore. Then you might be deemed to have acquired the visa under false pretenses, and the visa can be revoked. But as long as you do indeed treat Spain as your main base (assuming that Spain issued the visa) you won't be doing anything wrong by going elsewhere too.
Note also that there are no systematic checks on how well you follow your plan. You may be asked when you first enter to show some evidence that you're going to do whatever you got the visa to do, but once you're in, nobody is going to care unless you get into trouble with the authorities for other reasons.
However if you leave the Schengen area during your trip (such as to go to Britain for a short trip), you need to make sure that your visa allows enough entires for you to get back into Schengen afterwards