it is the closed group of people who trust each other.
For ex: In a typical software project, a manager(PM) with command and control attitude, would encourage creation of inner circle with project team members, whose opinions are being ignored by the PM. This inner circle group excludes the manager. This group in turn talk among themselves and share their agonies without the knowledge of the manager.
Above example of team member inner circle group, can be extrapolated at an organizational level with inner circle being the employee group excluding the management of the company.
The inner circle groups mentioned in the above examples are harmful for the project and the organization. They get created as they don’t have any venue to express their bottled up emotions/thoughts/opinions. This in turn leads to a lot of negativity. This negativity needs to be conquered sooner than later. Here is a good article, which provides techniques to conquer such negativity.
One of the ways to conquer the negativity is to provide a platform for the employees to express their thoughts/opinions/emotions. In Agile projects, retrospectives provides such a venue. This in turn leads to healthier project and teams in a longer term.