The Eagles swooped for 18-year old Gray on transfer deadline day, having a £500,000 bid rejected, with the Blues keen on retaining their England Under-19 international.
The forward has played five times in the Championship this season, with four times as a substitute, but Gray is regarded as one the brightest young talents outside of the Premier League.
Despite Championship survival only being confirmed on the final day of last season, manager Lee Clark is still confident promotion to the top flight is a real possibility - although he intends to see it done with a number of Birmingham youth products.
Quoted on Sky Sports, Clark revealed his desire to build a promotion winning squad with a central core of talented youngsters.
“We have lost too many good players I didn’t want to lose in the first couple of years here. I mean, you don’t want to lose the Nathan Redmonds of this world, the Curtis Davies. You lose those players and it’s difficult.
“But we have produced some more.
Having lost Nathan Redmond and Curtis Davies in recent seasons, Clark is intent that Gray will see the Blues back into the Premier League.
“I had a good conversation with Demarai and his mum, the early part of last week, because I felt it was necessary after turning down the move on deadline day.
“It was to explain how I see his future. And the fact we have got the same agent would probably make me furious anyway if he was to leave!
“We have to have him around. He showed on Saturday what a fantastic young talent he is.
“Him staying with us, getting a number of games under his belt, and hopefully one day getting back to the Premier League with Birmingham City, as a local boy, is the ideal scenario.
“Ultimately that is where he is going to end up (the Premier League).
“To keep these players, while we are still a Championship club - even though the history of us, the size of us - is not easy.
“When you have got players like that courted by Premier League clubs, when you are not in there yourself, it makes it even more difficult.
“But what I try to say to young players like Demarai is do they really want to go end up being in these big clubs' under-21 team when they can stay with us and get into the (realms) of hundreds of Championship appearances?
“That’s how we have to play it.”
Having featured seven times for the Blues last season, Gray was voted the Academy Player of the Season in 2014. The youngster will be hoping that he can push on even further this season, for both his and his team’s benefit.