Light shining through water droplets in the air splits the white light of the sun into all its different colours or spectrum. You can do the same with a prism or just use a CD on a sunny day! The size of the arc is dependant on the type of water droplet. Rainbows caused by sea spray are smaller than those caused by purer rainwater droplets.
Light is combination of 7 wavelengths. Each wavelength has unique color. When air contains heavy moisture, lot of water droplets move into air. When a ray sun light passes through water droplet it goes through 2 medium of different optical densities, air and water. Due to change in densities in light path multiple refraction and reflection take place which disperse the light into separate wavelengths with different colors. This is how we see the rainbows. One interesting fact,you can see rainbow always just opposite to Sun.
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