High rates of postnatal depression have been reported in the developing world. It has also been reported that more than 200 million children under 5 years of age in developing countries do not reach their developmental potential. This study examined the possibility of maternal depression as a risk factor for psychological development of infants. There is likely to be a particularly high risk during the first year of life, not only because this is a time of increased susceptibility of mothers to a depressive episode but also because it is during this period that the infant requires most responsive care. The aim of this study was to systematically investigate this association in a representative rural community- based sample in Rawalpindi, Pakistan, using a natural groups design. 160 infants of mothers diagnosed to have depressive disorder in the third trimester, and 160 infants of mothers psychologically well in the third trimester, were followed up for one year. Mothers’ mental state was re-assessed postnatally at 2, 6 and 12 months using the WHO Schedule for Clinical Assessment in Neuropsychiatry (SCAN). While, Bayley Scales of Infant Development were administered to the infants of both depressed and non-depressed mothers at the age of 12 months. Information was also collected about demographics, birth, socio-economic, and socio-cultural variables. Significantly lower developmental scores (Bayley mental, motor & behaviour rating scores) were found through univariate analysis in the infants at 12 months age who were exposed to maternal depression at 2 months postnatally as compared to infants of non-depressed mothers at 2 months postnatally. This association did remain significant for motor and behaviour rating scores at multivariate analysis, while mental scores did not remain significant along with significant association with infants having low birth weight and mothers having 4 or more children. Maternal depression is a significant risk factor of poor psychological development of infants in the first year of life. It may also be a significant marker for other infant risk factors such as low birth weight and maternal risk factor of having 4 or more children. The findings have implications for both infant and maternal mental health policy and practice.