Jesus prefaces His response to Nicodemus’s misunderstanding by the attention-getter, “verily, verily” (KJV).  The thrust of Jesus’ message is that we must be born again from God and that rebirth comes by the Holy Spirit.  In this answer to Nicodemus, Jesus adds “of water.”  Why?  There are 3 main lines of thought:

1. Water stands for purification. 
   Then this would be a reference to the baptism of John, which was for repentance.  The meaning would be that Nicodemus must turn away from his old life and way of thinking and receive the new life God was going to give him through the Spirit.
2. Water may be connected with procreation.
   Water was often used metaphorically of male semen but could also refer to the environment within which the baby develops. (Incorporated in birth is the opening of the sac and the gushing forth of water.)  In this case, the meaning would not greatly differ from being born of the Spirit.
3. Water may refer to Christian baptism.
   For this view is the natural association that Christians at the time of the writing of this gospel would have.  Against it is the fact that Jesus was enlightening Nicodemus, not trying to confuse him with something he could not have a chance of understanding.

RWP states, “By using water (the symbol before the thing signified) first and adding Spirit, he may have hoped to turn the mind of Nicodemus away from mere physical birth and, by pointing to the baptism of John on confession of sin which the Pharisees had rejected, to turn his attention to the birth from above by the Spirit. That is to say the mention of “water” here may have been for the purpose of helping Nicodemus without laying down a fundamental principle of salvation as being by means of baptism.”

John likes to state things in ways that may be taken more ways than one and there may be different valid meanings here.