[Bibio]

so can someone please explain to me why it matters what your desktop display mode is set to.

The video player (Kodi DSPlayer or otherwise) outputs to the GPU. The GPU then outputs to the display. So you want your output bit depth in madVR to match the output bit depth of the GPU to keep the video processing chain as lossless as possible. This is also why WASAPI Exclusive is used for audio; to avoid any interference from the audio renderer to the AVR or display. RGB Full is considered lossless in most cases, even though madVR has to convert from YCbCr to RGB to start the process.

The refresh rate of the GPU must be considered. The desktop defaults to 60hz but changes to match the video refresh rate in most cases. So you can have different RGB values and different bit depths in the GPU control panel for different refresh rates. It is the GPU that ultimately dictates what is sent to the display, so it is important to configure this correctly. madVR attempts to process the video in the highest-quality possible, and you want the GPU to passthrough this output as faithfully as possible. This would be RGB Full from madVR to RGB Full from the GPU, in most cases. And you need your display to be set to RGB Full, as well. 

if i'm understanding correctly then what you are saying is that the GPU will apply any settings in its "config utility" after madvr for the final output to the display device.

madVR -> GPU settings -> GPU output -> display device.