This could be translated two ways: 1. "And I didn't know Him, but to make [Him] manifest to Israel, that's why I came in the whater, baptizing." 2. " [...] why I came baptizing with whater"
How do you make a choice in such cases? Or, to put it differently, do you have to make a choice when doing a literal translation? Is it possible that John was sugesting both the sphere of action ("in the whater") and the instrument ("with whater") at the same time?
If it were just "ὕδατι", you'd face this difficulty; but with the preposition "in" a literal translation can only be "in water". Note that this means baptism by full immersion into the water (not by throwing a few water drops etc).
Think about a more ambiguous case, from the Old Testament, "chant in chords and instruments" (ἐν χορδαῖς καὶ ὀργάνοις).
Obviously ἐν doesn't mean "inside" chords and instruments. However, is it just "with" instruments? And if with instruments is OK, can we also say "with chords"?
To understand the meaning of this and the function of en for that meaning, we must imagine a scene, where faithful are gathered and praise God playing music and singing. The en of this phrase means precisely the community "inside music", in the middle of sounds, instruments and chanting, their hearts filled with music.
We then translate as if it was saying "be you inside music, gather and praise God inside a space of music". If there are cases when "en" has just instrumental value, these must be very few, and I can't think of one now.
Of course John uses the water, and the faithful use the instruments, as we also use even the air that we breath. The "en" preposition tries exactly to signify something different than the omnipresent use meaning. In other words: the interest of the holy persons who wrote the Bible, is not in what we do, but in who we are: it doesn't matter if we use instruments, but our hearts are empty of music, or if we use water, but our person is not immersed and cleaned in it.