Vedic Deities are indwelling.

The idea that Indra, Agni, etc.,  the thirty-three crore (1 crore = 10 million) devatas are indwelling powers I first heard from Dadaji Pandurang Shastri Athavale.  Dr. Nicolas Kazanas now writes on the same theme:

However, there is a vast difference between the Vedic conception of deities and other traditions including Buddhist, Christian etc, and even Hindu. This difference is hardly ever mentioned and when it is mentioned, as by Edgerton, it is hardly given much value. Vedic deities are forces within man. Yes, of course they are deities outside, all around, natural forces on earth, in the atmosphere and the sky, (the earth itself with its fecundity, waters, rain, air, sun, moon etc); there are also gods of morality like Varuṇa, Mitra and Bṛhaspati. But, as the Atharvavedic hymn 11.8.32 says, Man is the brahman and all devatā (deities, gods) reside in him as cattle in a pen!

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But the internalisation of the deities had already appeared in the RV. Agni, the Firegod, is said to be set within man’s heart hṛ́daya āhitá and, so, is the constant light of all inspiration, in the early hymn 6.9.6 of the Bharadvāja clan. This luminous power is perceived through mind mánasā nicay – (3.26.1) and itself as mental force manas is the fastest of all entities that fly (6.9.5). Indra too is internalised identifying himself with sages Manu, Kakṣivan and Uśanās (4.26.1) and his state may be attained by men, though not by deeds or sacrificial rites (8.70.3). Then, human functions like foresight and vigour are deified in 1.53.5 as devī prámati and devī táviṣī respectively.

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However, I do acknowledge that probably most people in the Vedic age regarded deities as external, imperceptible superhuman Powers that should be worshipped, placated and invoked for favours. Thus, from the very earliest hymns (Maṇḍalas 3, 6, 7) some people or clans, and certainly some rishis, knew that “deities” were not mere Powers of natural phenomena but also forces-functions within man.