Town were outplayed from the first minute with Chris Wood scoring twice on his debut after signing from West Brom and there were also two goals from Anthony Knockaert in an embarrassingly one-sided encounter.
"We wanted to start the New Year in a positive manner but today could not have been any worse for us," said Grayson.
"We wanted to be hard to beat and make sure it was a difficult afternoon for Leicester and make sure they didn't have an easy ride.
"But the way we started the game allowed them to dictate to us what they wanted to do. And before we knew it we were a couple of goals down and too many times made the wrong decisions. The third goal probably summed us up when we decided to play kamikaze football across the back.
"At half-time we talked about restoring some pride and respectability but before you know it we are four goals down and it becomes a real hard slog.
"As a team we didn't play well enough and made poor decisions against one of the best, if not the best, team in the division. We were lacklustre and architects of our own downfall."