Technically its Composite Video V RGB, but I guess they couldnt fit Composite in the space on the menu.
RGB is sent down 3 separate wires, and is very similar to the output from a computer to a VGA monitor, infact its even possible to get most VGA cards to output a SCART RGB compliant signal with a bit of cleverness.
Composite sqeezes both colour, and luminance (black and white version), into a single combined signal down a single wire. This is a lot less accurate which is why the menu's instantly look better in RGB. The colours of the broadcast TV picture are also improved, but its more obvious in the menus as there are many hard transisions of colour there.
The option is there because not all TV's support RGB on any/all of their scart sockets. My old TV only supported RGB on scart 1, and I used that for my RGB compatible DVD player, so I had to use the PAL setting for SKY. My new TV supports RGB on several scarts inputs, so now I can use RGB on both DVD and SKY.
Only fully wired scart cables support RGB, so your cheapo isnt actually the 'bottom of the range' as you clearly have a fully wired scart. However you can still get some further improvement with a better quality cable.