In a medium saucepan cook and stir uncooked rice in hot butter or margarine for 2 minutes. Carefully stir in milk and cinnamon (mixture may spatter). Bring to a low boil. Cover and cook over low heat about 30 minutes or until most of the milk is absorbed, stirring occasionally. (Mixture may appear curdled.) Remove saucepan from heat. Stir in vanilla. Swirl in caramel ice cream topping. Transfer to four individual serving bowls. Keep warm.
In a small saucepan heat the 1/4 cup sugar over medium-high heat until sugar begins to melt, shaking saucepan occasionally to heat sugar evenly. Do not stir until sugar begins to melt. Reduce heat and cook for 3 to 5 minutes more or until sugar is melted and golden in color. Remove pan from heat. Stir in the 2 drops hot water. Quickly drizzle topping over each serving of rice pudding. Makes 4 servings.