He said overseas students were being deterred from studying at British institutions and tight visa controls were causing difficulties for foreign experts working in the country.
The Business Secretary said foreign students were being caught up in the "very torrid and emotional" argument about the number of immigrants in the UK. Mr Cable insisted there was no cap on the number of overseas students but there was a problem of perception.
Speaking at the Global Universities Summit in Westminster, he said the debate over immigration "does incubate these very deep emotional feelings about foreigners".
Highlighting problems with the visa regime, he said: "I was at one of our leading engineering companies a few months ago.
"I was introduced to the chief engineer, who was making the most sophisticated engines for Formula 1 cars and he happened to be Indian, and he was coming to the end of his visa and under the existing rules he was going to have to go back to India and reapply for admission to the UK, right in the middle of a high-pressure contract. It was completely absurd.
Prime Minister David Cameron has said he wants to see net migration fall to the "tens of thousands" by 2015. Official figures last week showed that in the year to September 2012 net migration fell, with a 22% decrease in the number of foreign students.
Because overseas students were counted as immigrants under international rules, Mr Cable said their number was "easily translated into a flood of immigrants".
He added: "When, last week, the number declines, this is a great triumph for immigration control, which is quite absurd and unfortunately is seriously distorting the debate on sensible university policy and, indeed, sensible immigration policy. I just want to make absolutely clear, as far as the Government is concerned we have no cap on the number of overseas students, we don't propose to introduce one."