Some information about it from the NT Government website ...
"The main features of the Rainbow Valley area are the scenic sandstone bluffs and cliffs. These free standing cliffs form part of the James Range, and are particularly attractive in the early morning and late afternoon when the rainbow-like rock bands are highlighted.
The coloured rock bands in the sandstone cliffs were caused by water. In earlier wetter times, the red iron of the sandstone layers was dissolved and drawn to the surface during the Dry Season. The red minerals formed a dark iron surface layer with the leached white layers below.
This dark red capping is hard and weathers slowly, whereas the softer white sandstone below weathers quickly into loose sand."