Babatunde, who lives in the Nigerian state of Ibadan, scooped the £10 000 prize for his short story Bombay's Republic, about a Nigerian soldier fighting in Burma during World War II.
He faced competition from shortlisted writers from Kenya, Zimbabwe and South Africa.
The Caine Prize, backed by patrons Wole Soyinka, Nadine Gordimer and JM Coetzee, is awarded annually to an African writer of promise.
Along with South Africa, Nigeria is one of the most prolific producers of literature on the continent.
But, although the country has several reputable publishing houses, most writers aim for publication in Europe or the United States.
Caine Prize judge Bernardine Evaristo announced Rotimi Babatunde as the winner at a dinner held on Monday evening at the Bodleian Library in Oxford.
Evaristo said: “Bombay's Republic vividly describes the story of a Nigerian soldier fighting in the Burma campaign of World War Two. It is ambitious, darkly humorous and in soaring, scorching prose exposes the exploitative nature of the colonial project and the psychology of Independence.”