Lakshmi Rai was born in Bangalore and was brought up at Belgaum. She initially worked as a model before entering the film industry. She appeared in television ads such as Sylcon Footwears, Josco Jewellers and Emmanuel Silks. Her mother tongue is Tulu.
She made her acting debut in 2005 in the Tamil film Karka Kasadara. Subsequently she appeared in a number of Tamil films, including the comedy film Kundakka Mandakka (2005) opposite R. Parthiban, Perarasu's action-masala flick Dharmapuri (2006), and the romance film Nenjai Thodu (2007). In 2008, she began working in more serious films such as the drama film Velli Thirai, in which she played herself, and the action thriller Dhaam Dhoom directed by Jeeva. She received positive feedbacks forher portrayal of a lawyer in the latter. A review from Behindwoods wrote: "The latter (Lakshmi Rai) sizzles even as she is supposed to play the curt professional who is caught in the web of smuggling drugs".
She won her first Filmfare Award nomination in the Best Supporting Actress category.
She made her debut in Malayalam in 2007, starring in Rock & Roll opposite Mohanlal. She was noticed by the film field although film was a commercial failure. She followed it up with several successful films such as Annan Thambi, 2 Harihar Nagar (2009), Evidam Swargamanu (2009) opposite Mohanlal, and Chattambinadu (2009) opposite Mammootty. She appeared in three Tamil films in 2009, Muthirai, Vaamanan and Naan Avanillai 2. In Vaamanan, she played a glamourous supermodel. In 2010, she was seen in three films. She made special appearances during song sequences in two of them, In Ghost House Inn and Pen Singam and portrayed a cowgirl in the Tamil western adventure film Irumbukkottai Murattu Singam.
Lakshmi Rai's first 2011 release was Christian Brothers opposite Mohanlal, which was a high commercial success. Her next two films were Tamil projects, the comedy horror Kanchana and the Venkat Prabhu-directed action thriller Mankatha, starring Ajith Kumar. She essayed a negative character in the latter, which was received positively by critics.
Both films emerged high financial success. Following Kanchana's success, she was signed on to reprise the role in its Kannada remake too. Her latest release Arabiyum, Ottakavum, P. Madhavan Nairum opposite Mohanlal is declared superhit by trade. The year 2012 will see the release of the film Casanovva., Mayamohini, Adhinayakudu, Kalpana, and Thaandavam.