I see both sides of the issue here.
I agree with Vector on the potential legitimacy of capitalizing that word. And possibly so does the American Psychological Association:
Rust also insisted on Chicago Manual of Style form in research papers, even though some in the group wanted to use American Psychological Association style, in line with their more social science-oriented research.
I don't know if the APA actually advises capitalization of that word to recognize their status as a cultural group with a shared experience of oppression. But it's probably likely. Style books are a thing that matter to teachers, and I can easily see a disagreement of that nature being conflated to an unfair or biased grading policy.
Seriously. Follow the link in the original article, it's got actual context. Rise above the level of the mob reader of comments.
Maybe it's because I took a bit of Sociology in college and worked in a Sociological Research outfit on campus that I get where this argument comes from. I also nearly majored in English, and while my use of the language is pretty flimsy, I don't fault the teacher involved for adhering to what is a commonly recognized punctuation standard. It's about which interpretation you choose to grade against.
I disagree with Vector it's racially motivated in its application, at least based on what I've read. (Again, read the second article. Guy has at least one advocate of color who thinks this whole thing is pretty damn stupid.) Again, this is a question of malice. You can also say it's a question of the system of education in California and its cultural roots that underpin its current values. What everyone really wants to know is "is this incident a symptom of a larger pattern of discrimination in California higher education." And so far, no one in that pair of articles cites any data to that question. It's all anecdotal.
I'm not saying the teacher wasn't like "Look at Miriam X over there capitalizing indigenous. Well, I'll show her." But it's not the kind of thing you can assert without proof, and actual data to corroborate the claim.
Fun fact: the forum spellchecker puts indigenous in lower case.