Physical layer key generation exploiting inherent channel randomness is an open research area in securing the networks with resource constraint nodes; therefore reduction of numerical computation is desirable to save battery power. However, the correlated components due to colored noise also affect the system performance. In this work, we consider the correlated colored noise components along with the additive white Gaussian noise (AWGN) in the wireless channel and analyze the effect of these correlated components on the system performance. We further propose a hybrid averaging and dimensionality reduction (AvDR), based received signal strength (RSS) preprocessing which is the combination of moving window averaging (Av) and principal component analysis (PCA) as dimensionality reduction technique (DR) to improve the system performance. Further, the system performance was evaluated by numerical simulations, and it is observed that the same improvement in system performance is achieved by generating keys from a fewer number of points selected after PCA as compared to processing all the points. Picking a few of the points in the data sequence instead of all reduces the total number of numerical calculations and saves system power, which is the primary requirement of resource constraint networks like the IoT.