It is set to the absolute name of the module as imported. If you imported it as foo.bar, then __name__ is set to 'foo.bar'.
The name is determined in the import.c module, but because that module handles various different types of imports (including zip imports, bytecode-only imports and extension modules) there are several code paths to trace through.
Normally, import statements are translated to a call to __import__, which is by default implemented as a call to PyImport_ImportModuleLevelObject. See the __import__() documentation to get a feel for what the arguments mean. Within PyImport_ImportModuleLevelObject relative names are resolved, so you can chase down the name variables there if you want to.
The rest of the module handles the actual imports, with PyImport_AddModuleObject creating the actual namespace object and setting the name key, but you can trace that name value back to PyImport_ImportModuleLevelObject. By creating a module object, it’s __name__ value is set in the moduleobject.c object constructor.