Australian shares reversed course to end higher on Tuesday, supported by banking stocks, as an expected quarter-point rate hike by the central bank spurred investors' risk appetite.

The S&P/ASX 200 index was up 0.5% at 7,364.7 points at the close of trade. The benchmark ended 0.6% higher on Monday.

The Reserve Bank of Australia (RBA) lifted its cash rate by 25 basis points to the highest in more than a decade at 3.60%. This was the tenth increase since last May, lifting rates by a total of 350 basis points, easily the most aggressive tightening campaign by the central bank in modern history.

In a dovish step, the RBA changed a reference to further rate "increases", instead saying "further tightening" would be needed, suggesting it might be nearing the end of its rate hike cycle - one of the most aggressive in decades.

"We anticipate the market will like the dovish tone. Ultimately, this language may point towards RBA pausing rate increases in May after a final hike in April, bringing the cash rate to 3.85%," said Josh Gilbert, market analyst at eToro AUS Capital.

Financials led the gains on the benchmark with the sub-index ending 0.9% higher, as the rate hike and potential tightening lifted demand for banking stocks.

All "Big Four" banks traded in the black with a climb of up to 1.3%.

Energy stocks joined the rally as upbeat oil prices on China demand optimism helped the sub-index finish 1.2% higher.

Sector majors Woodside Energy and Santos rose 1.5% and 2.7%, respectively.

Miners dimmed the mood as they extended losses after seeing a heavy sell-off on lower iron ore prices overnight. Mining giants BHP Group and Rio Tinto declined 1.1% and 0.3%, respectively.

Among individual stocks, funerals company InvoCare Ltd received A$1.81 billion ($1.21 billion) buyout bid from private-equity TPG Global. Shares of InvoCare ended the day 34.4% higher.

New Zealand's benchmark S&P/NZX 50 index was steady and ended the session at 11,919.6.

($1 = 1.4901 Australian dollars)

(Reporting by Rishav Chatterjee in Bengaluru; Editing by Sherry Jacob-Phillips)