Static synchronous compensators (STATCOM) can be used as a reactive power compensation for induction motor (IM) loads due to its effective control and good compensation. Terminal voltage control (TVC) in a STATCOM has a great influence on voltage dynamics which is a significant concern in a system with many IM loads. This paper investigates the interaction between IM loads and TVC in a STATCOM under weak grid conditions from the viewpoint of active and reactive power flow. A corresponding induction machine model is proposed, based on which the interaction mechanism between IM loads and TVC in a STATCOM can be intuitively understood. It is shown that the negative damping component provided by TVC in a STATCOM can lead to system oscillation instability. Grid strength and the inertia constant of the induction machine affect the extent of such interaction. Time-domain simulation results of IM loads connected to an infinite system through a long transmission line, with STATCOM compensation implemented in MATLAB/Simulink, validate the correctness of the analyses.