The highly-rated 17-year-old winger has a signed a two-and-half-year deal.
Gray, who hails from Birmingham, has been with the club for the past ten years.
The teenager made his Blues first-team debut as a late substitute in the 4-0 home win against Millwall
He has subsequently gone on to make a further four appearances.
Gray, who has an abundance of pace and good dribbling ability, made his most recent appearance in the Sky Bet Championship draw against Blackpool towards the end of last month.