Plasma diagnostic instruments are carried into space by satellites to measure in situ the properties of space plasmas. However, due to spacecraft charging, satellites perturb the surrounding plasma, that reacts by enveloping the platform and its instruments with a short scale, strongly inhomogeneous plasma region called plasma sheath. Such plasma sheath perturbs particles and electric field measurements performed onboard the satellite. Mutual Impedance (MI) experiments are a type of in situ diagnostic technique used in several space missions for the identification of the plasma density and the electron temperature. The technique is based on the electric coupling between emitting and receiving electric sensors embedded in the plasma to diagnose. Such sensors are surrounded by the plasma sheath, which is expected to affect the plasma response to MI emissions. In this context, we quantify for the first time the impact of the plasma sheath on the diagnostic performance of MI experiments. For this purpose, we use a full kinetic Vlasov-Poisson model to simulate numerically MI experiments in an inhomogeneous medium. For the first time, we explain the locality of MI measurements. We find that MI plasma density diagnostic are not affected by the plasma sheath (dn/n < 10%). The experiment retrieves the density of the plasma unperturbed by the satellite's presence. The electron temperature diagnostic, instead, presents significant perturbations if the plasma sheath is ignored. To mitigate such electron temperature errors, the plasma sheath needs to be included in the analysis of MI measurements.