"Luther’s sacramental theology straddles between two extremes – the ex opere operato concept of Roman Catholicism and the baptism as symbolic external sign without real content of radical Protestantism and others. Luther sees baptism as one of the means of grace or sacraments. In the external form of water and together with the Word of God, baptism conveys God’s grace in forgiveness of sins and eternal life. Luther’s sacramental concept is extensive and covers both the Old Testament and New Testament. Old Testament rites are no less sacraments and their meaning is not exhausted by their symbolic value. Luther sees sacraments as masks behind which God works. God is present everywhere in the act. Even Jacob’s dream of the ladder and his wrestling with God at Jabbok has sacramental significance to Luther. In these appearances, as in baptism, God meets the believer. Both baptism and circumcision are seen as entry sacraments. They are not only just signs of the covenant, they are the covenant itself.
There is NO CONTRADICTION with Sola Fide. As to the relation between faith and baptism, for Luther baptism required faith for justification, but baptism and not faith provided the certainty of salvation. This is contra Baptists and others who see baptism merely as confession of faith. Luther says that God can save without baptism, but in the church we must judge and teach, in accordance with God’s ordered power, that without that outward baptism, no one is saved.(Luther’s Work Vol3 p274). In another word, Luther understood that baptism is NOT the cause of our salvation but God chose to save through baptism. Salvation is given in baptism, though not because of faith. God is the cause of our salvation, it is not man’s faith or baptism on its own [emphasis added]. The faith for justification is a gift of God lest any man should boast. Like in other sacraments, baptism is an activity in which God works salvation. But baptism is not the only mean by which God can save. That is why Luther could believe that babies who died before they can be baptised are saved. The thief on the cross who repented and trusted Jesus but has no chance to be baptised is undoubtedly saved too.
So when Lutherans say that baptism saves, they are not talking about “baptismal regeneration” as how other Protestants understand it. Baptism as a church rite saves nobody. It is God’s work in baptism that grants forgiveness of sins and eternal life. Faith receives God’s grace through this sacrament. This is where infant baptism comes in." -
Martin Luther’s Understanding of Baptism