Should NGINX resolve proxy_pass from localhost?

Question

I'm newbie in nginx, please help.

Here is my simple config:

server {
  listen 80;
  server_name kama.com.local;
  location / {
    proxy_pass http://localhost:7565;
    proxy_http_version 1.1;
    proxy_set_header Upgrade $http_upgrade;
    proxy_set_header Connection 'upgrade';
    proxy_set_header Host $host;
    proxy_set_header X-Real-IP $remote_addr;  # Pass real IP address to node
    proxy_cache_bypass $http_upgrade;
  }
}

It resolves my service from outside as expected, so nginx resolves kama.com.local to localhost:7565. But if local service tries to resolve kama.com.local nginx do not resolve anything. Simple test ping kama.com.local on nginx machine resolves not found.

Should nginx act as DNS from it's localhost, what am I doing wrong?