Why would an interviewer asks you which other schools you applied to?

[lorenzen]

And is there a diplomatic way to answer this?

[letsgetit21]

They’re trying to prognosticate their yield rate (the percent of admitted students that decide to come). Academia is a small world, so if you applied to a school that kind of fits your interests, but they’re aware you applied to a school with a much better fit, the committee will wonder about how seriously you might consider their offer. Then, they engage in a push and pull to guess if you might be admitted to the better-for-you school. 
 

two ways to diplomatically handle it, in my opinion. First, you can be honest and list every school and follow that up with why you feel ABC department - that’s interviewing you - makes the most sense for you (campus culture, funding, family in the area). Or, you could not be fully forthcoming and list universities around the same rank and lower, but still follow that with a why ABC department