When the PSVR is in this mode, it will display the input video in a cinema-screen like frame.
In cinematic mode, no lens distortion correction should be applied to the main video signal. The processing unit itself will take the flat image, render it to a rectangle in front of the viewer, applying distortion to the result before actually displaying it.
The PlayStation home screen is displayed in this mode, along with games that do not have VR support.