The ban, which was proposed by the state's top two associations of traders, came into effect on Wednesday.
The associations say that soft drinks firms take too much water from rivers, leaving farmers struggling to irrigate their land at a time of severe drought.
More than a million shopkeepers are expected to comply with the ban.
Two major trade bodies - the Federation of Tamil Nadu Traders Associations (FTNTA) and the Tamil Nadu Traders Associations Forum (TNTAF) - said they proposed the ban after seeing young people coming out in huge numbers last month against a ban on the local bull-taming festival, jallikattu.
Many who protested against the jallikattu ban said they saw it as an attack on local customs and traditions.
"We started the campaign against soft drinks several months back. But it gained momentum when we extended support to the pro-jallikattu movement," Tha Vellaiyan, president of FTNTA, told BBC Tamil.
"Drinks like Pepsi and Coca-Cola are not good for your health because of their high sugar and chemical content. We are promoting Indian soft drinks, and will encourage better sales of fruit juices," he said.
The associations have also urged supermarkets, restaurants and hotels to follow the ban and "help local businesses and farmers prosper".
Pepsi and Coca-Cola have not commented on the ban.
Traders in the southern Indian state of Tamil Nadu have banned the sale of Coca-Cola and Pepsi in favour of local products.