John 3:5
5 Jesus answered, Verily, verily, I say unto thee, Except a man be born of water and of the Spirit, he cannot enter into the kingdom of God.
This passage is used to teach Baptismal Regeneration - the doctrine that water baptism confers the new birth. The "water" in the passage is seen as referring to baptism.
There are two major views on what the "water" means in this passage from a Free Grace position.
The first view, and the view that I favor, is that being "born of water", in context, is referring to one's fleshly birth.
This is evidenced by the fact that in the passage, Christ is responding to Nicodemus' question about "entering the second time into his mother's womb":
John 3:3-7
3 Jesus answered and said unto him, Verily, verily, I say unto thee, Except a man be born again, he cannot see the kingdom of God.
4 Nicodemus saith unto him, How can a man be born when he is old? can he enter the second time into his mother's womb, and be born?
5 Jesus answered, Verily, verily, I say unto thee, Except a man be born of water and of the Spirit, he cannot enter into the kingdom of God.
6 That which is born of the flesh is flesh; and that which is born of the Spirit is spirit.
7 Marvel not that I said unto thee, Ye must be born again.
So, Nicodemus was thinking of physical birth, and Christ responds that there is a second birth that needs to take place - one has to be "born of water" (first birth) and "of the Spirit" (second birth - born again).
Then, in verse 6, Jesus restates what He says in verse 5, and replaces "born of water" with "born of flesh", while keeping "born of Spirit" constant. Therefore, "born of water" finds its parallel in "born of flesh".
"Water" is used as a euphemism for being born of a woman elsewhere in Scripture (Isaiah 48:1, Proverbs 5:15-18: 1 John 5:6), and this is carried on even until today, because the immediate thing that happens before a woman gives birth is that her "water breaks".
Therefore, Christ is telling Nicodemus that he already has one birth - a "water"/fleshly birth, and he needs the spiritual birth.
This spiritual birth - the subject of this article - whereupon someone is born into the family of God, is achieved by believing in Jesus, as we see just two chapters earlier, and also elsewhere in Scripture (1 John 5:1, Galatians 3:26):
John 1:12
12 But as many as received him, to them gave he power to become the sons of God, even to them that believe on his name:
The second interpretation of John 3:5 from a Free Grace perspective, is that being "born of water and of the Spirit" happens simultaneously at the moment of faith in Christ, and the "water" is referring to Jesus Christ himself.
This finds support in the fact that in the very next chapter, Christ refers to himself as the "Living Water":
John 4:10, 14
10 Jesus answered and said unto her, If thou knewest the gift of God, and who it is that saith to thee, Give me to drink; thou wouldest have asked of him, and he would have given thee living water.
14 But whosoever drinketh of the water that I shall give him shall never thirst; but the water that I shall give him shall be in him a well of water springing up into everlasting life.
Therefore, one could say that we are "born of water" when we are born again by faith in the Living Water (Revelation 21:6, 22:17), and thereby receive "the washing of water by the word" (Ephesians 5:26, John 15:3), the Word, of course, being Jesus Himself (John 1:1, Revelation 19:13).
In either case, this verse does not teach Baptismal Regeneration. In the passage, the Lord finishes His discussion with Nicodemus (John 3:1-21) exhorting him to "believe" four times (John 3:12, 3:15, 3:16, 3:18), and doesn't bring up water baptism to him at all.
This is because the new birth is obtained by faith in Christ, and not water baptism.