This wrong behaviour doesn't happen if you select "Books" or "Blogs" from the "more" option, but the link to YouTube is broken.
Technically, "%20" is how browsers encode any space characters that are part of a site's address (the query string submitted through a form, in our example). A quick look at the HTTP Headers tells me that Google's search result page is doing the right thing when querying in.youtube.com. But in.youtube redirects to www.youtube.com, in the process adding some "gl=IN" parameter. During this step, the %20 is not processed correctly. The percent itself gets escaped and as a result shows up in the search box! :)