All the data nodes put together form a storage area i.e. the physical location of the data nodes is referred to as Rack in HDFS. The rack information i.e. the rack id of each data node is acquired by the NameNode. The process of selecting closer data nodes depending on the rack information is known as Rack Awareness.
The contents present in the file are divided into data block as soon as the client is ready to load the file into the hadoop cluster. After consulting with the NameNode, client allocates 3 data nodes for each data block. For each data block, there exists 2 copies in one rack and the third copy is present in another rack. This is generally referred to as the Replica Placement Policy.