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.
He was naturally delighted to commit his immediate future to Blues: "I'm delighted to sign at the club. I've been here since the age of ten now and just to get this far it's great and it's a good time for me and my family," he said.
"I didn't expect to be in and around the first-team this early and to play so many games.
"But I'm just ready to kick-start even more now and just keep doing well when I come on and play and hopefully keep progressing and soon I'll hopefully be starting for the club."