First of all, family astrologer is consulted and he figures out the baby's moon sign based on the date/time wherein the baby was born. Remember that Indian astrology is based on moon signs and not sun signs (like Western stuff.. e.g. Linda Goodman's popular books).
With the moon sign comes along a list of letters with which the baby's name may start. This list of letters is pretty small, but not many people follow this anymore. We plan to follow this, but lets see how it goes.
Then there is this concept of purification of the newborn and the new mother. The new mother is considered impure after giving birth. Not only the mother, but the whole family related to the father and grand father, except the daughters and sisters in the family consider it impure. Those days almost no omnious tasks are taken up, the house gods are not worshipped (remember - its impure) and stuff like that.
After about two weeks (again, astrologer guy comes into picture and looks for a good day), a purification cum naming ceremony is held. Its here in this ceremony that the family is purified by performing a Yagna . Its here only that the baby is then given a name.
Some details on the newborn rituals are available on wikipedia.org
Now there can be as many pet names as one likes, but the one given by the grand father is considered the most respected one, and is mostly taken up as the formal name.
For our baby, we are thinking of holding this sometime next week. I'd sure post some details and the snaps of course.