Should reliance on Auto-Flight Systems continue to increase in favor of manual flying skills?
The FAA certainly believes that manual flying skills are eroded in an airline environment, although to what degree is unclear. SAFO 13002, Manual Flight Operations, says:


  Autoflight systems are useful tools for pilots and have improved
  safety and workload management, and thus enabled more precise
  operations. However, continuous use of autoflight systems could lead
  to degradation of the pilot’s ability to quickly recover the aircraft
  from an undesired state.


The SAFO is very brief, but there's a little more information in this document from the Air Carrier Training Aviation Rulemaking Committee (ACT ARC):


  The Flight Deck Automation Working Group (FltDAWG) identified that the
  lack of practice with automation has contributed to the degradation of
  manual flying skills. European Aviation Safety Agency (EASA) safety
  information bulletin 2013-05 comments that continuous use of automated
  systems does not contribute to maintaining pilot manual flying skills.


That document references a 2014 NASA study called The Retention of Manual Flying Skills in the Automated Cockpit. Its conclusion was:


  We found that while pilots' instrument scanning and aircraft control
  skills are reasonably well retained when automation is used, the
  retention of cognitive skills needed for manual flying may depend on
  the degree to which pilots remain actively engaged in supervising the
  automation.


The detailed analysis showed that motor skills are generally not degraded much (e.g. hand flying approaches) but cognitive (mental) skills like navigation and visualization are much more significantly affected:


  Pilots sometimes struggled to maintain an awareness of where the
  airplane was with respect to the planned route, to reference their
  charts to keep track of what came next, to configure the airplane anew
  as they passed each important waypoint along the planned route, and to
  recognize and deal with instrument systems failures when they arose.


At least based on that information, it appears that the physical activity of manual flying isn't badly affected by automation, even flying on instruments. The risks that NASA found seem to be broader and related to mental awareness and alertness, including the ability to troubleshoot.