And again, I'll drill with my brad point drill.
I spend a little time making sure that my inlay dots (also available from the usual luthier supply sources) will fit very tightly into the holes I drill.
Inlay dots are customarily available in metric sizes and a very few fractional sizes. Nothing like metric size brad point drills for this job!
Here's a shot of the drill bit with the nice flat bottom hole it produces.
I drill the hole considerably deeper than the thickness of the inlay dot.
Here, I'm coating the sides of the hole with yellow glue:
I don't fill the hole with glue because of the hydraulic pressure that might be generated when I jam in the dot
I'll place the dot in the hole, and tap gently to start it down in:
With an acrylic caul as big as possible to fit between the frets, I'll tap the inlay until it's set flush with the surface:
If all goes well, the inlay will sit so perfectly in the hole that no leveling will be necessary:
If I do need to sand, I'll always use a hard block and sand with the grain using very fine silicon carbide paper. Even the slightest scratch across the grain is noticeable and requires a lot of effort to clean up.