The third eye is present there (referring to the center associated with alertness or awareness). So there is a custom of applying sandal paste or other things at the location of pineal and pituitary glands which have a great effect on our body and mind.
One reason for applying the paste is to give respect to that portion of the forehead. It stimulates our attention.
Whenever you think, what do you do? Your hand automatically goes at this place. When you make a mistake, your hand goes at the head. When you think or deeply ponder over something or some problem comes then too you keep your hand like this. If you go to any country or any corner of the world, you find that everywhere people think like this.
This is the seat of wisdom. It is the peetha (seat) of knowledge. That is why chandan (sandal paste), kumkumor sindoor (vermillion powder) is applied there. It is symbolic.
Note: This is an excerpt of Sri Sri Ravishankar Guruji’s discourse as part of Satsang at Art of Living.