To be honest I have to dwell down and read so many websites before I was finally able to solve it on my own. Here are steps:
1. Open the internet explorer with 'run as admin' option.
2. Click on internet options on top right corner, click on security tab, click on local intranet tab, click on sites, select the automatically detect intranet network option
3. Go back to security tab, click on custom level, scroll down to last option User Authentication and select automatic logon with current username and password.
After applying above settings restart the internet explorer and open your report browser by typing - http://localserver/reports.
Hope this helps. Thanks