Run a lime wedge around the lip of a cocktail glass. Toss the sugar and chili powder together on a small plate, then dip and swirl the glass into the sugar to coat the rim. Shake off excess.
In the bottom of a cocktail shaker, muddle the watermelon, basil, and mint leaves until well crushed. Strain the juice onto a small bowl or glass. You should get about 1/4 cup of juice. Discard the solids.
Pour the watermelon juice into the rimmed cocktail glass. Stir in the lime juice, agave, and rum until combined. Fill the glass with ice.
Garnish with additional mint and basil leaves, and watermelon wedge, as desired.