There should be no problem running the installation from a local machine and connecting to a SQL Server on another machine to deploy the database. There are a few things to note though:
1) The Warning message you are receiving is indicating that either a) the Sql Server is not available on the network, or b) your logged in account doesn't have permissions.
To deploy the database, the logged in account you are using to run the msi must be a sysadmin on SQL Server in order to create the database, set the database settings, and run the installation scripts.
Also verify that the SQL Server instance has TCP protocols enabled so it can accept remote connections.
2) The msi will register the MSE as installed on your local machine (in Add/Remove Programs) even if you only intend to install the Catalog Repository and point it to a remote machine. This can cause a problem since the installer will check
to see if you already have the MSE installed locally. So from your local machine if you have the MSE already installed, you wouldn't be able to use the msi to deploy the database to another machine.
I'd recommend following the path that tonygon mentions above if you have problems with deploying the database using the msi. Ultimately the msi is just calling the DeployDatabase.bat file that exists in the repository folder. So if you use
it directly you may be able to identify the problem more easily.