Interactive Queries in Apache Kafka's Streams API allows users to query the local state of a Kafka Streams application without accessing an external database. It treats the Kafka Streams application as an embedded, lightweight database. The local state is fault-tolerant and can be sharded across tasks to scale horizontally. Users can discover other application instances and their state to perform queries on remote state if needed. Interactive Queries simplifies stateful stream processing by reducing moving parts compared to using an external database.