Sterilization refers to the actions taken by a country`s central bank to counteract the effects of capital inflows or outflows on the nation`s money supply. Here`s how the options break down:

Option 1: Conducting Open Market Operations is indeed a part of sterilization. Central banks, like the Reserve Bank of India, buy or sell government securities in the open market to control the nation`s money supply. This is a primary tool of monetary policy used to steer economic activities.

Option 2: Oversight of settlement and payment systems is a regulatory function done by the central bank to ensure smooth, safe, and efficient payment transactions. It`s essential, but not directly involved with sterilization.

Option 3: Debt and cash management for Central and State Governments is about optimally raising and managing debts as well as ensuring sufficient cash flow to meet government liabilities. Again, important but not directly in line with sterilization.

Option 4: Regulating the functions of Non-banking Financial Institutions pertains to the central bank`s role in regulating and supervising these institutions to maintain economic and financial stability, which doesn`t particularly involve sterilization.