I was able to resolve this issue.

The problem was with the encoded_userdata. I initially had the following line in my code:

encoded_userdata = base64.b64encode(day0_config_content.encode()).decode()

Removing that line entirely and just passing the raw JSON string directly worked:

day0_config_content = json.dumps(ftd_config, indent=4)

ftd_vm_create["vm_customization_config"] = {
    "datasource_type": "CONFIG_DRIVE_V2",
    "files_to_inject_list": [],
    "fresh_install": True,
    "userdata": day0_config_content,
}

After removing the Base64 encoding, the password started working correctly, and I was able to log in with the AdminPassword provided in the Day 0 config.

Hope this helps someone else facing the same issue.