I am trying to understand a RTC module from Sparkfun.
I don't understand the purpose of the capacitor in this circuit.
Can some one please explain its purpose.
This is a slightly silly and simplistic analogy: -
The capacitor is like a flywheel on an engine - it smooths the rather sporadic pulses of energy associated with the movements of pistons and produces a more constant drive to the wheels of your vehicle.
Without a flywheel, the jolts and impulses from the pistons would be felt all over the vehicle and things might rattle and break or even fall-off in the road. In other words, without a flywheel, all parts of the vehicle feel the effect of the pistons.
If your chip didn't have a local decoupling capacitor, all the pulses of current it draws from the supply would "shake" the power supply voltage around and cause interference on all other circuits sharing the same power supply.
The capacitor is there as local decoupling for U1.