In VFDs, could motor current parameter be set higher than the actual motor's current?
The maximum current you set on a VFD is the current "limit". When you hit that limit the voltage will droop (foldback) to prevent more current being drawn and the motor rapidly overheating. 

Will the 0.5 HP motor draw more current if you are using it within its ratings ...NO
......except that you could potentially overload the motor if you apply more physical load. If you increase the physical load, then a motor draws more current (at a given voltage and frequency) but eventually the motor will stall, then all the input power is dissipated as heat.

The most important characteristics of a VFD are the voltage output and frequency for any particular motor. 
If you have a 0.5HP motor specified at 230 volts, then the maximum load current would be defined by the voltage and the phase impedance of the windings (load). If you set the current limit high for the motor and apply larger physical loads you would expect larger currents to flow and the motor to heat up. Whether you damage the motor over time would be unknown and subject to the construction of the motor.  

If you have a 7 HP VFD, then obviously you can set the current limit to a higher value.    

Since the voltage output of the VFD is regulated at 220 - 230 V for example, the 0.5 HP motor won't be 'forced' to take any more current than it requires due to the applied physical load.  

Would being able to set a higher current limit provide better performance for the 0.5 HP motor .....very unlikely .... you might just possibly see a more rapid acceleration under load ...because the motor impedance is lower, but you are potentially exceeding the performance/load characteristics of the motor. The downside to overload is heat. Whether that damages your spindle (I assume that's what you are driving) is unknown.  

Though targeted at larger motor applications, this might help you with VFD sizing.