Well, in the context of light novels, 'I'm capped at level 1' could imply that there is some sort of system in place within the fictional world of the novel. It could be a magical, technological, or some other kind of system. This cap might be there to prevent a character from becoming too powerful too quickly. It can also be used to introduce elements of inequality or unfairness in the story, which can then drive the plot as the character tries to find ways around this limitation.
In light novels, when it says 'I'm capped at level 1', it often indicates a situation where there is a ceiling on growth. Maybe it's a plot device to create tension. If a protagonist is capped at level 1 while facing powerful enemies that are much higher level, it sets up a challenge that has to be overcome through other means like strategy or special abilities rather than just leveling up.
It means that the character or something in the light novel is restricted or limited to level 1. For example, in a game - like world in the light novel, a character might be unable to progress beyond this initial level due to certain in - story rules or conditions.