Updated answer (June 2023)
AAB is mandatory when updating/uploading apps in Playstore.
Google Play will start requiring new apps to be published with the
Android App Bundle starting August 2021. This will replace the APK as
the standard publishing format.
Source: https://android-developers.googleblog.com/2021/06/the-future-of-android-app-bundles-is.html
Update: As of 2023, the answer below is obsolete.
> 1. So the question is, is it mandatory to upload only aab files to PlayStore or normal apk file can also be updated
Normal APK can also be uploaded / updated. This is just a warning and not an error message. Google Play will still allow you to continue
- If aab file has to be uploaded, then how to sign the aab file before
uploading.
In Android Studio, when building signed APK / AAB, it will ask you to export an encrypted key. Take note of the location because you will use this exported key when you upload your AAB. See highlighted in yellow 
I referred this Link for Goolge App signing. Is this also required ?
Nope, it's optional. Quoting Google Play Support:
Using app signing by Google Play is optional. You can still upload an APK and manage your own keys instead of using an app bundle. However, if you lose your keystore or it becomes compromised, you won’t be able to update your app without publishing a new app with a new package name. https://support.google.com/googleplay/android-developer/answer/7384423