The story takes place in India, where a bunch of children are playing inside a house. It is summertime, and the weather outside is so hot that everyone has crowded indoors to try to escape the heat; however, the kids get antsy and restless indoors. They want to go outside and play, and are feeling cooped up and fidgety.
So, the physical location begins in a house, but soon the children are let outdoors and are giddy with the chance to play. The atmosphere of the story is created mainly through the mood of the children. At first, the atmosphere is defined by their stifled anxiety about being cooped in the house. Desai writes that being indoors
"made them feel that their lungs were stuffed with cotton wool and their noses with dust and if they didn’t burst out into the light and see the sun and feel the air, they would choke."
So the story opens with this feeling of tense restlessness, of being oppressed and wanting to be elsewhere. But then, as the children are let out, the atmosphere changes to one of ecstatic giddiness; they run free, screaming and jumping, and the mood is one of excitement and joy. The total abandonment and freedom of childhood games is felt in the atmosphere.
Then, the atmosphere becomes one of chaos as the kids try to decide what to do, what to play, and who is to be "it" in their game of hide 'n' seek. The, the tension increases again as they struggle to find good hiding places, and as Ravi perches in the garage, that tension increases until Raghu passes by.
Throughout the story, the atmosphere changes moods as quickly as the children change moods, which is often. It reflects beautifully the transient and intense joys and miseries of childhood, chronicalling the moods of it well. I hope that those thoughts help; good luck!