BENGALURU, Aug 5 (Reuters) - Indian shares settled higher on Friday, supported by banking stocks, while the rupee and bond yields firmed after the Reserve Bank of India hiked its key policy rate on expected lines.

The Monetary Policy Committee (MPC), in a unanimous decision, raised the repo rate by 50 basis points to 5.40%, as the central bank sought to tame persistently high inflation in Asia's third-largest economy.

India's annual consumer inflation remained above the 7% mark in June and beyond the RBI's upper tolerance limit of 6% for a sixth month in a row.

"With inflation expected to remain above the upper tolerance threshold in Q2 and Q3 of the current financial year, the MPC stressed that sustained high inflation could de-stabilise inflation expectations and harm growth in the medium term," RBI Governor Shaktikanta Das said.

With the raise, the MPC said it remains focused on withdrawal of accommodation to ensure that inflation remains within the target, while supporting growth.

The NSE Nifty 50 index was up 0.09% at 17,397.50, at close, and the S&P BSE Sensex advanced 0.15% to 58,387.93. Both the benchmark indexes, after rising over 0.5% at session high, ended 1.4% up in their third weekly gain.

"The MPC rate hike was in line with the market's expectations of anywhere between 35 to 50 basis points. Though at the higher levels we were seeing some profit taking, which is a trend seen in the last few trading sessions," said Ajit Mishra, vice-president of research at Religare Broking.

In Mumbai trading, Nifty's finance, private bank index and bank index closed 0.4% higher each.

The rupee closed up 0.3% at 79.23 per U.S. dollar, having jumped up to 78.94 in the session.

India's benchmark 10-year bond yield rose to 7.315% as of 1035 GMT.

Among other individual stocks, automaker Mahindra and Mahindra Ltd fell 2.1% after it reported a lower operating margin.

Fintech firm Paytm closed 3.1% lower, ahead of its quarterly earnings results later on Friday. (Reporting by Rama Venkat in Bengaluru; Editing by Uttaresh V and Shailesh Kuber)