“Holy water” illustrates one of the prime features of religion that people generally miss.
It’s “holy water” not because anyone thinks there is something superstitiously different about it as a result of having been blessed [by God through the agency of the priest], but because it has been ceremonially set apart for the purpose of being used in a religious ritual – whether that be for baptizing someone, by sprinkling or by total immersion, for dipping ones fingers into and making the sign of the cross on oneself, for communicating Mormons in the sacrament (Mormons use water where other Christians use wine or grape juice), or for whatever purpose.
And ritual is for the benefit of human beings. For the religious, God is not limited in what He can do by ritualistic rules – He’s perfectly capable of doing something contrary to them, and often does [in, of course, the frame of reference that understands there to be a God active in the world and people doing things according to His rules]. Like hobbits, we humans enjoy re-enacting the familiar and stable. Ask any three-year-old why he or she enjoys having the same story read to him/her for the 47th time.
In the liturgical churches, baptism is the sacramental rite of initiation, the one through which God forgives sins and cleanses of sinful nature [or, actually, begins that process] and through which one “dies to sin and is raised to new life in Christ” and becomes part of His family the Church. (In Bibliocentric evangelicalism, it’s seen as an ordinance, not a sacrament – something done as a public mark of one’s commitment to Christ, not carrying any functional baggage but done because He ordained it as something properly to be done.) It’s important to note that sacraments are not seen as superstitious magic, but as God using the material world in which He has placed us as a method of bestowing His grace on us. He can and does work outside the sacraments; they are means whereby He can work through us, enabling us to be participants in His extending of grace to others. (All this is of course reported as tenets of sacramental theology, true within its frame of reference – the response to a hypothetical GQ question, “What do liturgical Christians believe goes on in a sacrament?” rather than an assertion of undebatable fact about the world.)
Just as my wife might tell me, “Don’t eat those four slices of bread I have set out on the counter; they’re for making stuffing for the turkey,” the ritual of blessing an object, e.g., a font of water, is ritualistic, just as Monty notes above, the setting apart of something for ritual use.
The piece of parchment enshrined at the National Archives that begins, “We the people…” is not in and of itself anything special: it owes its particular value to Americans in that it is the original Constitution, the physical representation of the compact by which we govern ourselves and protect each other’s rights as free people. Likewise, the water in a baptismal font, a Mormon Sacrament service, or those little sconces at the entries of Catholic churches, is not special in and of itself – but only because it’s been set apart ceremonially for use in religious ritual.