Naturally, this expression originated from persuading people to join them in a pool/lake or any water to let them know it wasn't too cold. But since then, we often use this expression to simply let someone know that a situation will be comfortable for them.
Examples:
Sue is reluctant to enter an office because it's full of managers.
One of the managers says, "Come on in, Sue! The water's fine."
At the party, Mike sees Jane in the kitchen with several friends. He doesn't want to intrude because she seems preoccupied, so he remains at the doorway.
"Come on in, the water's fine!" Jane says, inviting him to join them.