Inside JVM, i understand replacing the policy files with unlimited strength allows to encrypt files using key size more than 128. This is fine.

But just I want to understand if it does impact any existing functionality? In short other that its intended induced functionality will it causes any existing working code to break.

In the general case this will always be safe to do. The only circumstances where it isn't is if the JCE provider you are using will only run under certain explicit policy constraints. I'm not aware of any general commercial or opensource provider that behaves like this, although you might encounter it in some government or large corporates where algorithms and key sizes that can be used are dictated by law or policy.

Other than that the policy files will not affect any software outside of the JCE.

Regards,

David