Second-half goals from Luis Suarez, Lionel Messi and Aleix Vidal secured all three points at the Santiago Bernabeu to extend Barca's lead at the summit of La Liga to nine over Atletico Madrid after their 1-0 defeat to Espanyol on Friday.
Zinedine Zidane's side, meanwhile, are now a whopping 14 points behind Barca – having played one game less – but Iniesta is refusing to rule them out of the title race.
"I do not think the distance in points shows the distance in quality between the two teams," Iniesta told beIN SPORTS.
"We are very respectful of Madrid. We know they are one of the best clubs in the world, so we never rule them out for La Liga.
"There are still so many matches to play and Madrid, in their history have always proved they can pull off the impossible."
Iniesta admitted the hosts were the dominant side in the first half, but commended the Catalans' ability to turn the tide and register a memorable triumph.
"I want to congratulate the whole team on a great win," he added.
"In the first half, Madrid had more chances than us. They were playing a more attacking style of football to us and were stronger than us.
"In the second half we turned the tables and were more comfortable
"In the first half they played us one-on-one but were not able to keep up that demanding style of play in the second half."