On a related note, it looks like water candles don't affect the chance of eyethulu spawning, of blood moon happening, or of goblin invasions occuring. They don't appear to do anything when sitting in your inventory, either. The only time they have any effect at all, as far as I can tell, would be when they're someone's selected item, and even then it looks like (from looking at the code) they only affect spawning monsters around that particular player - I think.
They decrease the spawn rate to 0.75x normal and increase the maximum number of monsters to 1.5x normal, and bypass the low cap on both spawn rate and the high cap on maximum number of monsters.
Interestingly, night time applies a 0.6x multiplier to spawn rate and 1.3x multiplier to max spawns. Blood moons apply a further 0.3x multiplier to spawn rate, and 1.8x to max spawns. Everywhere, but it caps out:
Spawn rate cannot be below 0.1x default unless you're using a water candle (its multiplier is applied after the limit is enforced).
Max spawns cannot be above 2.5x normal unless you're using a water candle (its multiplier is applied after the limit is enforced).
Dungeons have 0.1x spawn rate and 2.1x max spawn; invading them at night would only push the max spawn up to 2.5, which isn't much of a change. Invading them at night with a water candle as your equipped item, however, would increase max spawns to 3.75x. But again, putting water candles in your inventory or putting them on tables doesn't appear to do anything, as far as I can tell.