These keywords control IMTA's use of the VRFY command in its SMTP client. Under normal circumstances there is no reason to issue a VRFY command as part of an SMTP dialogue. The SMTP MAIL TO command should perform the same function that VRFY does and return an appropriate error. However, servers exist that can accept any address in a MAIL TO (and bounce it later), whereas these same servers perform more extensive checking as part of a VRFY command.
The IMTA can be configured to issue SMTP VRFY commands. The keyword domainvrfy causes a VRFY command to be issued with a full address (user@host) as its argument. The localvrfy keyword causes IMTA to issue a VRFY command with just the local part of the address (user. novrfy is the default).