Thanks @chandrasekhar_g, But I think you missed the part in the post. All the configurations I did are from the implementation guide and if you go through the guide, it doesn't have the answers for the question i asked :(
Hi, starting with CS 8.2, all chats are front-ended by a chatbot, which allows the end user to escalate to a live agent if needed. This requires the Self-Service application to be created, along with a Chatbot that can be deployed on your site.
I have some questions on your observations. Without having done the above and deploying the chatbot, how did you start the chat? Did you use the Chat JS snippet on a page? That approach does not work with 8.2 and later releases. One of the other changes that came in was that the chat routing has been moved into the Pega CS application. So, if you deploy chat with the snippet, that tries to use the older routing mechanism, which does not work with 8.2.