Construction of Financial Liberalisation Index for India: An Application of Principal Component Analysis

This paper draws an attention to construct the financial liberalisation index for India by taking in to account various liberalisation policy measures, which includes Interest Rate Deregulation (IRD), removal of entry barriers to the private banks, reduction in policy rates, introduction of prudential norms and reforms in capital markets. Principal component analysis (PCA) has been employed to construct the financial liberalisation index. The constructed index shows that with mild changes in the initiation of financial liberalisation policies, the degree of financial liberalisation in India has improved. Particularly, the process of financial liberalisation in India speeds up during the period 1992–1997 by commencement of key liberalisation policy measures. Thus, it is clear that, the period from 1992–97 greatly witnessed, in which all the key policy measures had been implemented. One basic merit of the present study is that, both partial and full liberalisation policy measures were taken in to account while constructing the index.