Yes 1/16" hole is large, but because I am using #5 blades tilted at a 2.2 degrees the hole must be larger than the blade. I drill this 1/16" hole with a mini drill press and a dremel type rotary tool at 6.6 degrees. I drill the hole just inside the pattern and it then comes out of the upper wood just outside the lower wood , in the waste part.
This hole does occasionally show up a little, so before gluing the inlay in place, I sand off this hole and after glueing it in place and sanding it I fill that slight gap, and any others with a mixture of sanding powder (not sawdust, it is way too coarse) and white glue and squeege it into the voids using a credit or gift card.