"In or out?" That's a question we often put to our cat, who loves to sit on our doorstep and just stare at us without making up his mind whether he's coming inside, or going outside. (You're really a handful, Mr. Whiskers.)
It's also a useful question when thinking about the setting of "As Kingfishers Catch Fire." We have an external setting, which is filled with animals and objects that send their inner essence out into the world through their actions. This is the world of kingfishers, dragonflies, stones, musical strings, and bells. Really, the whole first half stanza 1 takes place in this external setting, which the speaker takes note of and references for his own purposes.
Starting with line 5, though, the poem shifts its setting from the external to the internal world. The speaker begins to contemplate how each living thing "Deals out that being indoors each one dwells" (6). In other words, we're starting to think more about how these external actions are actually just expressions of internal qualities ("that being indoors").
That line of thinking—and the internal setting—carries over to dominate stanza 2. In the poem's second section, the speaker is concerned with the religious importance of acting in accordance with your inner self. In that way, this poem really encourages us to match up our own settings, both the internal and the external. By acting externally on the true nature of our selves—which lives in us internally—we're doing what we were put here to do. Our selves, our actions, and our settings are all in alignment. Good times.