Well, that could be the problem right there. She been hit, so naturally she's going to hit. If my sister hit one of my children..... I'll stop there, not too gentle thoughts going on. I'd stop that crap this second. Your sister can do as she wishes with her children, as can you, but if you've decided not to hit them, then you can't let her hit them either. Ever.
When I hold Atticus I essentially hug him pretty tightly, not in a bear hug, but he's clearly restrained. And, I speak very softly to him. He calms right down and listens. I suspect that this behaviour is normal in some children. None of my others have done this, but as he's my 3rd he has been given more "roughness" by his brothers than they got when they were his age. Also, he's more frustrated because he's not big enough to do the stuff they do.
So, yes, I suspect it's normal for some kids.
Hitting her for hitting makes zero sense. Also, gentle, peaceful parenting is a commitment, and one that is long term. It takes a while to acheive results here. And, when you feel like it can't be getting better, it does. Have faith. She'll get it. But, you have to be consistent, firm and fair. Choose your battles and don't undertake a "firm stance" unless you're willing to take it to the bank, you know?