"These particular sites we know have become honeypots for drug dealers," Social Housing Minister Pru Goward told 2GB radio on Tuesday.
"What we're trying to do is to break those down."
The policy is aimed at removing temptation for drug users and reducing instances of anti-social behaviour, she said.
"If our tenants are going to have a good shot at getting their lives back on track, we need to remove the temptation to go back onto drugs."
The state opposition, however, fears the move will simply turn Sydney's western suburbs into a "dumping ground for drug dealers".
Ms Goward denied it was a matter of exporting the problem, saying there was more public housing in the inner-city than anywhere else in NSW and other options were available in places like Pyrmont and Moore Park.
To date, 46 tenancies have been terminated for drug dealing or manufacture in Redfern and Waterloo since 2014, a department spokesman said.
Another 32 people who don't live in the area have also been banned from going there for drug-related activity.
"The new inner city allocations policy aims to further improve the safety of these communities by not introducing new tenants with a recent history of drug manufacture or serious drug supply and who are at high risk of reoffending," a Family and Community Services spokesman said.