Itihasa literally means "indeed that is how it happened". The modern English word History in correctly represents this meaning. Hindu texts are divided into two main components. Shruti (as heard), Smriti (as remembered). Shruti texts consist of Vedas and Upanishads. These are the most scared and more revered texts and more importantly they are believed to be ancient and source of all knowledge. They are without a creator. Smriti on other hand contains Manusmriti and related books, Puranas, Ramayan and Mahabharat. 

Itihasa is a part of Smriti texts. Why did our ancestors decided to use the word 'itihasa' instead of anything else ? In modern context when we think of the word history we are more interested in knowing things like "India got freedom on 14th August 1947" and similar factoids which are provable, where the evidence exists and more importantly devoide of any supernatural elements. 

If Ramayana is part of "Itihasa" how can a reasonable person believe that Ramayana is a History ? Did Hanuman actually jump from India to Sri Lanka ? Did Ram exist ? How can we be sure if he was born in Ayodhya ? 

Questions like these emerge quickly an people who are not rooted in Hindu dharma will easily see that these questions have merit in them. 

In the next chapter we go deeper into how Ramayana is a Itihasa but not History.