According to a report in the Financial Times yesterday, the Indian naval vessel INS Airavat was confronted in international waters by a Chinese ship demanding that the Indians explain their presence.
The incident brings into the open India's strategic ambitions in Southeast Asia and, it appears, China's displeasure.
The South China Sea is now widely seen as one of the region's key strategic flashpoints. China's territorial claim over most of the South China Sea has brought it into dispute with five other countries in the region.
The dispute has now come to symbolise China's resurgence as a major military power and its potential to destabilise the whole Asia-Pacific.
The recent launch of China's first aircraft carrier has brought fears about the expansion of China's naval power to the fore. Robert Kaplan, a leading American strategist, has predicted that the South China Sea will be the "military front line" of China in coming decades.
For many years, the South China Sea dispute largely only involved China and ASEAN states. Vietnam, with its long coastline and its tangled history with China, has often been at the forefront of the dispute.
Tensions between them have been increasing and some believe that there is now a high chance of conflict over the issue. Last year the Chinese upped the ante, reportedly stating that the South China Sea is a "core national interest" on par with its claims to Tibet and Taiwan.
This has led the US to take a more active role in the dispute, siding with ASEAN and defending its right to freely use this vital trading route. A US aircraft carrier made a highly symbolic visit to Vietnam in a pointed response to China's claims.
One of the most significant recent developments is an announcement that India is working with Vietnam to establish a regular Indian naval presence in the region.
India has long had a special relationship with Vietnam. For many decades, India supported Hanoi's fight against the domination of Indochina by outside powers.
During the Cold War, both India and Vietnam fought bitter wars against China and both ultimately aligned themselves with the Soviet Union, largely out of their fear of China.
Over the last decade or so India has been trying to develop a broad security partnership with Vietnam, offering to supply advanced weapons, including anti-ship missiles, and training for its navy and air force. It seems this partnership may now be coming to fruition
In recent weeks, Vietnam has agreed to give India rights to use the small port of Nha Trang and the Indian navy's INS Airavat was the first ship to visit under the new arrangement.
The Vietnamese made great symbolic use of the occasion, inviting the visiting Indians to lay flowers at the statue of a famous Vietnamese commander who had led his country to victory over a Chinese fleet in 1288. It is not yet clear to what extent the Indian navy intends to establish permanent facilities to support what it calls a "sustainable presence".
Nevertheless the agreement represents an important signal to China by both Vietnam and India. This point has not been lost on the Chinese, who confronted the Indian ship after it left Nha Trang.
The use of the port of Nha Trang, located very close to Cam Ranh Bay in southern Vietnam, was no coincidence. For some strategists, Vietnam's naval base at Cam Ranh Bay represents a key factor in the military balance of the region.
Known as one of the finest harbours in Southeast Asia, Cam Ranh Bay was developed as a huge military base by the US during the Vietnam War. It was then used by the Russians until 2002.
Since the early 1990s the Indian navy has sought basing rights at Cam Ranh Bay, without success.
Vietnam has long understood that allowing a foreign naval presence at Cam Ranh Bay is its strategic trump card in the South China Sea dispute.
Vietnam is now signalling a willingness to play that card against China.
What are India's interests in the South China Sea?
Like the US, India has a keen interest in the security of the trading routes that cross the South China Sea to Northeast Asia and the US.
In coming years, India will also increasingly rely on oil supplies from Russia's Pacific coast.
But India's strategic interests in Indochina go far beyond this. Some in New Delhi see benefit in a security alliance with Vietnam against China, just as China has long supported Pakistan against India. Others argue that India should build a naval presence in the South China Sea in response to China's perceived intrusions into the Indian Ocean. The debate in New Delhi is far from over.
However, the development of a security role in the South China Sea certainly represents an opportunity for India to demonstrate its credentials as an Asia-Pacific power.
The US has been pressing India to take a more active role in the Asia-Pacific for years.
It is not clear where this will all lead. If India acts carefully, the development of a small Indian naval presence in the South China Sea might bolster its claim to be an Asia-Pacific power without provoking too great a reaction from China.
But the appearance of the Indian navy in China's backyard could also lead China into upping the ante in both the South China Sea and the Indian Ocean.
Strategic rivalry between India and China in the Indian and Pacific oceans is something that Australia is keen to avoid.
It seems India has entered some uncharted waters.
David Brewster is a visiting fellow at the Strategic and Defence Studies Centre, ANU. He is the author of India as an Asia Pacific Power