An interactive stream is one on which it makes sense to perform interactive querying.
The precise meaning of an interactive stream is implementation-defined, and may depend on the underlying operating system. Some examples of the things that an implementation might choose to use as identifying characteristics of an interactive stream include:
The stream is connected to a person (or equivalent) in such a way that the program can prompt for information and expect to receive different input depending on the prompt.
The program is expected to prompt for input and support "normal input editing".
read-char might wait for the user to type something before returning instead of immediately returning a character or end-of-file.
The general intent of having some streams be classified as interactive streams is to allow them to be distinguished from streams containing batch (or background or command-file) input. Output to batch streams is typically discarded or saved for later viewing, so interactive queries to such streams might not have the expected effect.
Terminal I/O might or might not be an interactive stream.